BLBG: Yen Gains as U.S. Government Weighs Up Citigroup Rescue Plan
By Ron Harui and Candice Zachariahs
Nov. 24 (Bloomberg) -- The yen climbed against the dollar and the euro as investors, awaiting the outcome of discussions over a possible U.S. government bailout of Citigroup Inc., shunned higher-yielding assets.
The yen also gained against the Australian and New Zealand dollars, two favorites of so-called carry trades financed with loans from Japan. The dollar slid against the euro as U.S. regulators held talks with Citigroup, whose shares plunged 60 percent last week, to cap the lender's potential losses on more than $100 billion of toxic assets.
``The fact that we're waiting for further news on official support for Citigroup is leaving markets a little bit on the defensive,'' said Tony Morriss, a senior currency strategist at Australia & New Zealand Banking Group in Sydney. ``These issues around Citi are a particularly U.S. problem.''
Japan's currency rose 0.8 percent to 95.22 per dollar as of 11:02 a.m. in Singapore, from 95.94 in New York on Nov. 21. It climbed 0.5 percent to 120.06 per euro. The dollar traded at $1.2611 per euro from $1.2587. Foreign-exchange movements may be exaggerated because trading volumes are lower than usual due to a Japanese public holiday today, Morriss said.
The yen climbed 1.7 percent to 59.64 versus the Australian dollar, 1.6 percent to 50.63 against the New Zealand dollar and 1.2 percent to 6.907 per Mexican peso. Japan's benchmark interest rate of 0.3 percent compares with 3.25 percent in Europe, 5.25 percent in Australia, 6.5 percent in New Zealand and 8.25 percent in Mexico.
In a carry trade, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the two. The risk is that currency market moves erase those profits.
`More Nervous'
The Federal Reserve and Treasury Department were locked in discussions with Citigroup, once the biggest U.S. bank by market value, throughout the weekend and a deal may be reached before the start of trading this week in New York, according to people familiar with the talks. The non-performing assets would remain at Citigroup, with the government agreeing to assume losses beyond a specified amount, they said.
``The longer this announcement takes the more nervous the market will get,'' said David Forrester, a currency economist at Barclays Capital in Singapore. ``They're caught a little bit long the yen crosses.'' Such positions are bets that currencies including the Australian dollar will rise versus the yen.
Yen Bets
Futures traders trimmed bets that the yen will gain versus the dollar, figures from the Washington-based Commodity Futures Trading Commission showed on Nov. 21.
The difference in the number of wagers by hedge funds and other large speculators on an advance in the yen compared with those on a drop -- so-called net longs -- was 24,134 on Nov. 18, compared with net longs of 24,511 a week earlier.
Implied volatility on one-month dollar-yen options rose to 24.67 percent from 23.98 percent on Nov. 21, indicating a greater risk of exchange-rate fluctuations that may erode profit on carry trades.
The euro's gain versus the dollar may halt before a German report today that economists estimate will show business confidence fell to a five-year low in November, reinforcing the case for the European Central Bank to cut interest rates.
``The report may point to a pessimistic outlook on Germany's economy,'' said Norifumi Yoshida, vice president of the trading section at Mizuho Corporate Bank Ltd. in Singapore. ``It would be negative for the euro.''
The Ifo institute's business climate index declined to 88.7 from 90.2 in October, according to the median estimate of economists surveyed by Bloomberg News. That would be the weakest reading since April 2003. Ifo will release the report, based on a survey of 7,000 executives, at 10 a.m. in Munich today.
Traders increased bets last week that the European Central Bank will lower its 3.25 percent benchmark rate in coming months. The implied yield on the Euribor interest-rate futures contract expiring in March dropped 24 basis points to 2.57 percent on Nov. 21 from 2.81 percent on Nov. 14.
To contact the reporters on this story: Ron Harui in Singapore at at rharui@bloomberg.net; Candice Zachariahs in Sydney at at czachariahs2@bloomberg.net
