BLBG: Dollar, Yen Weaken on Speculation U.S. to Raise Citigroup Stake
The dollar and the yen fell against the euro on speculation the U.S. government will increase its stakes in domestic banks to shore up the financial system, damping demand for the currencies as a refuge.
The dollar declined for a third day versus the euro, the longest losing streak this year, as stocks rose and Treasuries fell after the Wall Street Journal cited unidentified people as saying the U.S. may raise its holding in Citigroup Inc. The pound gained for a third day against the dollar after a person familiar with the matters said Royal Bank of Scotland Group Plc plans to cut costs by more than 1 billion pounds ($1.44 billion).
“The market’s focus on the situation with Citigroup is going to keep the dollar under pressure for the next few days,” said Ian Stannard, a foreign-exchange strategist in London at BNP Paribas SA, France’s largest bank. “Medium term, we’re likely to see trends re-establishing themselves.”
The dollar dropped to $1.2891 per euro as of 9:12 a.m. in London from $1.2826 in New York at the end of last week. The yen weakened to 121.15 per euro, from 119.68. The dollar rose to 93.99 yen, from 93.35.
The U.S. government may end up holding as much as 40 percent of Citigroup’s common stock, while bank executives prefer the stake to be closer to 25 percent, the Wall Street Journal said.
Stocks rose, with the MSCI Asia Pacific Index gaining 0.8 percent and the Dow Jones Stoxx 600 adding 0.9 percent. Futures on the U.S. Standard & Poor’s 500 Index rallied 1.5 percent.
Bank Takeovers
Senate Banking Committee Chairman Christopher Dodd said on Feb. 20 some banks may have to be taken over for “a short time.” His House counterpart, Financial Services Committee Chairman Barney Frank, along with Republican Senator Jon Kyl rejected having the government step in to run banks.
Citigroup and Bank of America Corp., which received $90 billion in U.S. aid in four months, tumbled as much as 36 percent on Feb. 20 on concern the U.S. may take over the banks. The Obama administration said in response a “privately held” banking system is the “correct way to go.”
The ICE’s Dollar Index, which tracks the greenback against six major trading partners such as the euro and the yen, declined for a third day, losing 0.1 percent to 86.424. The U.S. currency weakened to $1.4532 per pound, from $1.4433. It was at 1.1582 Swiss francs, from 1.1560.
ECB Speakers
The euro pared gains against the dollar after European Central Bank President Jean-Claude Trichet said credit flows in the euro region are starting to decline. The financial system remains under “severe strain,” which is hampering an economic recovery, Trichet said in a speech to European securities regulators in Paris today.
Europe’s single currency traded at 88.54 British pence, from 88.91 pence. It was at 1.4907 Swiss francs from 1.4820.
Citing problems recapitalizing banks in central and eastern Europe, U.K. Prime Minister Gordon Brown said yesterday the European Group of 20 leaders proposed the creation of a $500 billion fund to help increase the International Monetary Fund’s resources for crisis management.
Europe’s single currency rose 3.3 percent versus the greenback since touching a three-month low of $1.2513 on Feb. 18, as concern surrounding European banking losses eased amid international efforts to address the problems.
Trichet said on Feb. 20 it’s a mistake to say the euro region has any weak links and rejected concern about fragility in the Irish economy.
Trade Deficit
The yen fell to a five-week low against the euro before a government report this week that economists say will show Japan posted a trade deficit for a fourth straight month.
“Japan’s trade balance is worsening, so the yen is losing some of its safe-haven status,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “There is a risk the yen may be sold” to 120.85 per euro today, he said.
The Finance Ministry’s custom-cleared trade balance statistics on Feb. 25 may show Japan posted a trade deficit of 1.18 trillion yen in January, according to a Bloomberg News survey of 26 economists.
The yen is heading for its worst month against the dollar since April after government reports showed Japan is sinking deeper into recession, with fourth-quarter gross domestic product contracting at an annual rate of 12.7 percent, the most since the 1974 oil shock.
Since January, the correlation between the yen and the cost of protecting against a default on Japanese government bonds swung to negative 43 percent, showing investor concerns are increasing. The yen and cost of credit-default swaps moved in tandem 88 percent of the time last year.
“We wouldn’t really have looked at sovereign credit-default swaps in any great detail before” the September bankruptcy of Lehman Brothers Holdings Inc. caused credit markets to freeze, said Lee Hardman, a strategist at Bank of Tokyo-Mitsuishi UFJ Ltd. in London. “It’s an area which potentially is going to see increasing focus as a driver of currency rates.”
