BLBG: Japanese Yen Falls on Speculation U.S. to Raise Citigroup Stake
The yen weakened against the euro and the dollar on speculation the U.S. government will increase its stakes in domestic banks to shore up the financial system, damping demand for the Japanese currency as a refuge.
The yen dropped most against the pound 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 matter said Royal Bank of Scotland Group Plc plans to cut costs by more than 1 billion pounds ($1.44 billion).
“The euro and the dollar will continue to gain against the yen over the next few weeks,” said Henrik Gullberg, a currency strategist in London at Deutsche Bank AG, the world’s largest foreign-exchange trader. “There is a general decline in yen sentiment on the back of a very sharp decline in economic activity in Japan.”
The yen slid 2 percent to 121.71 per euro as of 7:10 a.m. in New York from 119.68 at the end of last week. The dollar strengthened to 94.88 yen, from 93.35, and traded as high as 94.95 yen, its highest level since Dec. 1. The euro was little changed at $1.2829, from $1.2826.
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 World Index gaining 0.6 percent and the Dow Jones Stoxx 600 adding 0.3 percent. Futures on the U.S. Standard & Poor’s 500 Index rallied 0.9 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, snapped a two-day decline, rising 0.1 percent to 86.550. The U.S. currency weakened 1.5 percent to $1.4636 per pound, from $1.4433. It was at 1.1615 Swiss francs, from 1.1560.
Trichet on Flows
The euro erased 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 87.70 British pence, from 88.91 pence. It was at 1.4910 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 2.5 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.
Stay Dollar ‘Positive’
Investors should “maintain a positive outlook” on the dollar over the next three months and sell the euro against the U.S. currency, Ashley Davies, a foreign-exchange strategist at UBS AG in Singapore, wrote in a note to clients today. ING Groep NV is “positive on the dollar for the next couple of years,” currency strategist Tom Levinson said in a Bloomberg Television interview today.
If U.S. President Barack Obama achieves his goal of halving the deficit by the end of his first term in office, that will eliminate “one of the reasons people are negative on the dollar in the very long term,” Levinson said. By Daniel Tilles
Investors should sell the dollar against the yen, according Barclays Plc strategists led by David Woo in London said in a report today.
“The overvaluation of dollar-yen relative to our estimate based on its short-term drivers has reached extreme levels as of Friday’s close,” Barclays said. “These are good levels to sell” the dollar, “especially as Japanese exporters remain likely to increase hedges and Japanese investors repatriate assets as they approach year-end.”
Yen’s Worst Month
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.
Negative Correlation
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.”
