Yen Gains as Report on U.K Deposit Scheme Causes Risk Aversion

Sept. 25 (Bloomberg) -- The yen gained versus the British pound and the euro after the Independent newspaper reported the U.K.'s deposit protection plan needs more cash after the bail out of mortgage lender Northern Rock Plc.

The yen climbed against the 16 most-active currencies as investors reduced holdings of higher-yielding assets funded by loans from Japan, known as carry trades. The U.K. Financial Services Compensation Scheme holds funds of only 4.4 million pounds ($8.9 million), while a similar U.S. fund has $49 billion, according to the article on the newspaper's Web site.

``The news caused risk aversion, prompting yen-buying,'' said Yuji Saito, head of the foreign-exchange sales department at Societe Generale SA in Tokyo.

The yen rose to 231.17 versus the pound at 11 a.m. in Tokyo, from 232.27 yesterday in New York. It climbed to 161.55 per euro from 161.79 and to 114.73 against the dollar from 114.86. The yen may rise to 114.30 versus the dollar today, Saito forecast.

In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the borrowing and lending rate. The risk is that currency moves erase those profits.

Japan's currency advanced the most against New Zealand's dollar, a favorite of the carry trade, gaining 0.7 percent to 85.22 from 85.78 in New York yesterday. Against the Australian dollar, it climbed 0.3 percent to 99.36. Australia's key rate is 6.50 percent and New Zealand's is 8.25 percent.

Northern Rock

The Bank of England agreed to bail out Northern Rock on Sept. 14 after the U.K. loan provider requested an emergency credit line, stoking concern other lenders will need cash. Chancellor of the Exchequer Alistair Darling pledged Sept. 17 to guarantee deposits as Northern Rock customers withdrew an estimated 2 billion pounds after the bank applied for emergency funds.

``The pound is being sold on this news,'' said Tetsuhisa Hayashi, chief currency trader in Tokyo at Bank of Tokyo- Mitsubishi UFJ Ltd., a unit of Japan's largest lender by assets. ``The amount for protection is too small. Investors are afraid this could trigger a run on the banks, just like we have seen people rush into Northern Rock on TV.''

The pound fell to $2.0147 against the dollar from $2.0223 yesterday. It may drop to $2 and 228 yen today, Hayashi said.