The yen and the dollar weakened versus the euro on speculation U.S. efforts to support the banking system will reduce demand for the currencies as havens. Japan’s yen declined against all of its major counterparts as people familiar with the matter said the Federal Deposit Insurance Corp. will manage a “bad bank” that President Barack Obama’s administration will set up to help end the credit crisis. The dollar dropped against the euro before the Federal Reserve ended a two-day meeting at which it may announce plans to buy assets to boost credit markets. “Risk appetite is returning to the forefront, and that’s why the dollar and the yen are losing momentum,” said Audrey Childe-Freeman, a senior currency analyst at Brown Brothers Harriman & Co. in London. “There seems to be some optimism with regard to another U.S. rescue package.” The yen declined 1.5 percent to 118.81 per euro at 7:58 a.m. in New York, from 117.08 yesterday, when it reached 119.45, the weakest level since Jan. 19. The dollar slid 1 percent to $1.3292 per euro, from $1.3160 yesterday, when it touched $1.3330, also the weakest since Jan. 19. The yen fell 0.5 percent to 89.43 per dollar, from 88.97. The pound climbed for a third day, rising 1.5 percent to $1.4339 after reaching $1.4344, the strongest level since Jan. 20. The FDIC, chaired by Sheila Bair, may manage a planned operation that would buy the toxic assets clogging banks’ balance sheets, two people familiar with the matter said. The “bad bank” initiative may allow the government to rewrite some of the mortgages that underpin banks’ bad debt. Yen Versus Aussie The yen dropped 1.6 percent to 59.79 versus the Australian dollar and 1.8 percent to 38.66 against the Brazilian real on speculation U.S. efforts to end the credit crisis will encourage investors to resume carry trades, in which they get funds in a country with low borrowing costs and buy assets where returns are higher. Japan’s 0.1 percent target lending rate compares with 4.25 percent in Australia and 12.75 percent in Brazil. European stocks rose, with the Dow Jones Stoxx 600 Index adding 2 percent, its third consecutive day of gains. Demand for higher-yielding assets also improved as the cost of protecting European corporate bonds from default fell. The U.S. currency traded near a one-week low versus the euro before the Fed ended its policy meeting today in Washington. The central bank will keep the target rate for overnight loans between banks in a range of zero to 0.25 percent, according to the median forecast of 46 economists surveyed by Bloomberg News. ‘Risk Appetite’ “The dollar will come under additional selling pressure with improving risk appetite,” analysts led by Hans-Guenter Redeker, London-based global head of foreign-exchange strategy at BNP Paribas SA, wrote in a note today. “U.S. banks cleaning balance sheets by transferring toxic assets into the bad bank will reduce the need to repatriate foreign asset holdings.” Investors should use any weakness as an opportunity to buy the dollar and yen because the financial crisis may persist, said Brown Brothers’ Childe-Freeman, who expects the greenback to strengthen to $1.25 per euro in the third quarter. BankUnited Financial Corp., Florida’s largest bank, reported a fourth-quarter loss yesterday of $607 million and said it may be placed in receivership because capital ratios are below levels required by regulators. “Investors are still cautious over taking risk,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “The trend for yen appreciation may continue.” The yen may strengthen to 88.50 against the dollar and 116.70 per euro today, Ishikawa said. ECB Rate The euro may extend gains on speculation the European Central Bank will refrain from cutting its benchmark rate from 2 percent to zero, traders said. Zero rates won’t “necessarily” help restore confidence in the banking system, ECB Executive Council member Lorenzo Bini Smaghi said in an interview with Italy’s Il Foglio newspaper yesterday. “The ECB seems reluctant to cut rates toward zero,” said Emmanuel Ng, an economist at Oversea Chinese Banking Corp. in Singapore. “The euro may remain relatively strong” within a range between $1.31 and $1.33 today, he said. Investors should buy the euro against the yen, Citigroup Inc. said in a note to clients, citing charts analysts use to forecast currency movements. ‘Double Bottom’ The euro may rise to as high as 130 yen because a “double bottom” appears to be forming, analysts led by New York-based Tom Fitzpatrick, Citigroup’s chief technical analyst, said in a report dated yesterday. Investors should exit the trade if the euro falls to 115.50 yen, Citigroup said. A double bottom appears when a currency makes two consecutive troughs of about the same depth, indicating it may be poised to rebound. The pound rose to a one-week high against the dollar as concern eased that the U.K. will have to increase spending to bail out the nation’s financial institutions. Barclays Plc said this week it won’t need funding from the government because it exceeds regulators’ capital requirement by 17 billion pounds ($24.3 billion).

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