July 11 (Bloomberg) -- The yen retreated from a one-month high against the dollar as Japanese individual investors took advantage of a 1.4 percent rally yesterday to sell the currency and buy higher-yielding assets.
Japan's yen also pared gains against the Canadian dollar on speculation the Bank of Japan will keep its overnight lending rate at 0.5 percent tomorrow, encouraging so-called carry trades. The yen surged yesterday as U.S. stocks slumped, raising concern global fund managers will pare riskier holdings.
``The yen-selling needs of retail investors are strong,'' said Ryohei Muramatsu, manager of Group Treasury Asia at Commerzbank in Tokyo. ``After the 1 1/2-yen fall in the U.S. currency yesterday, they're eager to buy the dollar on dips.''
The yen traded at 121.72 per dollar at 11:09 a.m. in Tokyo from as high as 120.99 and from 121.74 late in New York yesterday. Japan's currency traded at 167.19 per euro from as high as 166.61. The yen may decline to 122.00 against the dollar and 167.60 per euro today, Muramatsu said.
BOJ Governor Toshihiko Fukui and his colleagues will keep the key overnight lending rate unchanged at the conclusion of a two-day meeting starting today, according to all 43 economists surveyed by Bloomberg News. The bank last raised the rate in February.
Of 34 economists surveyed, 21 said the central bank will raise the rate to 0.75 percent in August and eight said it will act in September. Three of the remaining five predicted October, one said November and the other said the rate will stay at 0.5 percent this year.
Moms and Pops
Yen sales by Japanese mom-and-pop investors last week exceeded professional traders' bets against the currency on the Chicago Mercantile Exchange.
Net short positions on the yen against the dollar, or wagers the currency will fall, reached $1.1 billion among traders using borrowed funds on July 3, according to Tokyo Financial Exchange. Based on estimates of the exchange's 5.8 market share by the Bank of Japan, the total position of individual investors is about $19.77 billion, compared with $15.83 billion of bets on July 3 by traders on Chicago's market.
The dollar fell to a record low against the euro on speculation the housing market slump will worsen. The dollar yesterday fell to an all-time low of 77.7103 against the currencies of seven trading partners, according to a Fed index published on its Web site.
Subprime Spillover
The U.S. currency yesterday sank against the Swiss franc, British pound and Danish krone after Standard & Poor's warned it may cut ratings on $12 billion of bonds backed by subprime mortgages, diminishing the appeal of dollar-denominated assets. Futures contracts show traders forecast the Federal Reserve will keep borrowing costs on hold through year-end.
The dollar traded at $1.3735 after dropping as low as $1.3784 per euro today.
``There's a real risk we start to see the subprime issue spill over into confidence and consumption,'' said Robert Rennie, chief currency strategist a Westpac Banking Corp. in Sydney. ``We are already seeing warning signs in gloomy retailer earnings forecasts. This will continue to weigh on the dollar,'' to 120 yen by Sept. 30 and 118 yen by year-end, he said.
The Fed held benchmark borrowing costs at 5.25 percent on June 28 for an eighth meeting. The European Central Bank may lift its key refinancing rate from a six-year high of 4 percent by September, according to interest-rate futures.
Japan's Foreign Reserve
Japan, the largest overseas holder of U.S. Treasuries, should invest $700 billion of its currency reserves in higher- yielding assets such as stocks and corporate bonds, said Takatoshi Ito, an adviser to the prime minister.
The reserves should be managed by a special fund that will gradually diversify into euros, Australian dollars and emerging market currencies, he said in an interview in Tokyo. Ito said that the Ministry of Finance, which expanded its currency reserves by selling yen in 2003 and 2004, has essentially borrowed the funds from the Japanese people.
``Foreign currency reserves are assets that belong to our citizens,'' Ito said. ``The government has borrowed the money from the people and it is engaged in a kind of carry trade. So it has to show some higher return on the investment.''