BLBG: Yen Rises on Concern U.S. Bank Rescue Plan Won't Stop Recession
By Ye Xie and Anchalee Worrachate
Oct. 15 (Bloomberg) -- The yen rose for the first time in five days against the dollar on speculation the U.S. plan to invest $250 billion in financial institutions won't prevent the world's largest economy from falling into a recession.
Japan's currency gained versus the euro and the South African rand as stocks dropped globally, encouraging investors to sell higher-yielding assets and pay back low-cost loans in Japan. The dollar extended its losses after a government report showed U.S. retail sales declined the most in three years.
``This market is still skittish,'' said Jon Gencher, director of currency sales at BMO Capital Markets in Toronto. ``If equities take a nosedive, the yen will be in favor.''
The yen climbed 0.8 percent to 101.27 per dollar at 10:07 a.m. in New York, from 102.07 yesterday. Japan's currency gained 1 percent to 137.59 per euro from 139.04. The dollar traded at $1.3593 per euro, compared with $1.3619.
U.S. retail sales decreased 1.2 percent in September, the most since August 2005, following a 0.4 percent drop in the prior month, the Commerce Department reported today in Washington. Federal Reserve Bank of San Francisco President Janet Yellen said yesterday in a speech in Palo Alto, California, that the economy ``appears to be'' in a recession.
``Concerns over a U.S. recession may now intensify as those over a financial crisis have abated for the time being,'' said Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland Plc in Tokyo and a former Bank of Japan currency trader. ``These worries may lead to dollar selling, yen buying.''
Yen vs. Rand
Japan's currency gained 3.7 percent to 10.77 against the South African rand while the Swiss franc rose 3.6 percent to 11.20 Mexican pesos as a drop in global stocks increased speculation that investors will abandon carry trades, in which they get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's 0.5 percent target lending rate and Switzerland's 2.5 percent benchmark compare with 12 percent in South Africa and 8.25 percent in Mexico.
Money-market rates fell for a third day, fueling speculation that the global bailouts are starting to thaw credit markets. The London interbank offered rate, or Libor, that banks charge each other for three-month dollar loans dropped 9 basis points, or 0.09 percentage point, to 4.55 percent, the British Bankers' Association said.
The dollar rose to the highest level versus the euro since March 2007 on Oct. 10, partly because banks' reluctance to lend to each other spurred a surge in demand for U.S. currency funding in global money markets. The U.S. Treasury announced yesterday a plan to inject $250 billion into financial institutions, one day after European governments committed $1.8 trillion to guarantee loans and invest in lenders.
`Slow Improvement'
``There will be slow improvement in wholesale funding,'' said Robert Sinche, head of global currency strategy at Bank of America Corp. in New York. ``Over time, the dollar funding issue will sort itself out, which will lead to some retracement of the recent dollar gains. Any doubt on whether we'll have a recession has to fade now.''
Volatility implied by one-month dollar-yen options climbed to 22.06 percent, from 20.54 percent yesterday, indicating a larger risk of exchange-rate fluctuations that may erode profits on carry trades. It reached 32.175 percent on Oct. 10, the highest since Bloomberg began compiling data in December 1995.
The yen rose for the first time against the euro in three days as the MSCI World Index lost 1.4 percent and the Standard & Poor's 500 Index dropped 2.4 percent.
Japan's currency was also supported by repatriation of funds by Japanese investors, said Derek Halpenny, head of global currency strategy in London at Bank of Tokyo-Mitsubishi Ltd.
`Appetite for Risk'
``Japanese households' appetite for risk was already diminishing before the turmoil last week materialized, with new repatriation of investment trusts in September,'' Halpenny said. ``The actual repatriation of funds is a rare occurrence and underlines the shift taking place in regard to risk.''
The 15-nation euro may drop 13 percent versus the yen by the end of the year on concern global credit markets will remain depressed even after U.S. and European officials made as much as $3 trillion available to unclog lending, according to Citigroup Global Markets Inc.
The euro may reach 120 yen as investors favor the relative safety of Japan's currency, said Tom Fitzpatrick, global currency head of strategy at Citigroup in New York.
``You can't have the amount of fear we've just had in the last three weeks and think people are just going to go roaring back to put on risk trades,'' said Fitzpatrick.
Expectations for currency appreciation were the highest for the yen, the Swiss franc and the dollar, according to the Bloomberg Professional Global Confidence Index, based on a survey of 3,764 Bloomberg users last week. The index for the yen rose to 71.89, from 64.75. For the franc, it increased to 65.04, from 44.51. The index for the dollar was 61.28, down from 68.86.
To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net
