The dollar and the yen weakened to almost one-week lows versus the euro on speculation U.S. efforts to support the banking system will reduce demand for the currencies as havens. The 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. “It’s a risk-on type of situation,” said Andrew Busch, a global currency strategist in Chicago at BMO Capital Markets, a unit of Canada’s fourth-largest bank. “The market is selling U.S. dollars against major currencies.” The dollar slid 0.8 percent to $1.3269 per euro at 9:45 a.m. in New York, from $1.3160 yesterday, when it touched $1.3330, the weakest level since Jan. 19. The yen declined 1.4 percent to 118.67 per euro from 117.08 yesterday, when it reached 119.45, also the weakest since Jan. 19. The yen fell 0.4 percent to 89.32 per dollar, from 88.97. Sterling climbed as much as 1.5 percent to $1.4344, the highest level since Jan. 20, as concern eased that the U.K. will have to widen deficits to bail out the nation’s financial institutions. The currency plunged to $1.3503 on Jan. 23, the lowest level since September 1985, after the government announced a second bank bailout in three months. Soros on Pound Billionaire investor George Soros, who made $1 billion selling the pound in 1992, said today he’s no longer betting against the currency after it reached $1.40. “I did actually foresee the fall in sterling, and that was one of the positions we carried,” Soros told reporters at the World Economic Forum in Davos, Switzerland. Below $1.40, “it seemed to me the risk-reward was no longer clear,” he said. Brazil’s real gained as much as 2.6 percent to 2.2841 per dollar, the strongest level in more than two weeks, and the Norwegian krone appreciated 1.5 percent to 6.6839 on reduced demand for the safety of the world’s reserve currency. 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 bad debt. ‘Selling Pressure’ “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.” The yen dropped 1.6 percent to 59.79 versus the Australian dollar and 1.8 percent to 38.66 against the 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. The Standard & Poor’s 500 Index increased 2 percent, while the Dow Jones Stoxx 600 Index added 2.7 percent. Fed’s Meeting 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. The euro may extend gains on speculation the European Central Bank will refrain from cutting its benchmark rate from 2 percent to zero, said Emmanuel Ng, an economist at Oversea- Chinese Banking Corp. in Singapore. 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. Investors should buy the euro against the yen, Citigroup Inc. said in a note to clients, citing charts analysts use to forecast currency movements. 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 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. U.S. Treasury Secretary Timothy Geithner’s call for China to loosen restrictions on its currency was criticized in Davos. Allowing the yuan to strengthen would be “economic suicide” during an economic slump, Stephen Roach, chairman of Morgan Stanley Asia Ltd., told a panel at the forum. China’s yuan increased 0.1 percent to 6.8443 per U.S. dollar today.

Source