The yen and the dollar fell, with Japan’s currency touching a five-month low against the euro, on speculation new U.S. government steps to help banks deal with toxic assets will boost demand for higher-yielding currencies. The dollar extended last week’s biggest decline since the 1985 Plaza Accord as Treasury Secretary Timothy Geithner intends to expand the Federal Reserve’s $1 trillion Term Asset-Backed Securities Loan Facility to buy frozen assets, according to unidentified people familiar with U.S. proposals. The Australian and New Zealand dollars rose for a second day versus the yen as gains in Asian stocks spurred investors to seek higher returns. “The so-called bad bank plan, aimed at removing bad loans from private banks, may improve prospects for riskier assets, including stocks and higher-yielding currencies,” said Yasuhide Yajima, senior economist at NLI Research Institute Ltd., a unit of Japan’s second-largest life insurer. The improved outlook for riskier assets “should reduce demand for safe-haven currencies,” he said. The yen dropped to 131.71 per euro as of 12:10 p.m. in Tokyo from 130.29 on March 20. It touched 131.97, the lowest since Oct. 21. Japan’s currency declined to 96.44 per dollar from 95.94. The dollar weakened to $1.3657 per euro from $1.3582 late in New York on March 20. The U.S. currency reached $1.3738 on March 19, the lowest level since Jan. 9. Against the yen, Australia’s dollar rose 1.8 percent to 67.12 and New Zealand’s dollar advanced 1.5 percent to 54.41. Obama Administration The Obama administration will today outline regulatory changes aimed at avoiding a repeat of the financial crisis that’s crippled the U.S. banking system. Geithner and Fed Chairman Ben S. Bernanke will testify at the House Financial Services Committee tomorrow on the government’s rescue of American International Group Inc. “For the dollar to weaken further this week, we would need to see either a further improvement in risk appetite, perhaps on the Treasury toxic asset plan or from comments by Bernanke should he emphasize the Fed’s determination to run very loose monetary policy,” Ashley Davies, a currency strategist at UBS AG in Singapore, wrote in a note today. The Fed unexpectedly announced on March 18 that it will buy as much as $300 billion of Treasuries and increase purchases of agency mortgage-backed securities, to lower consumer borrowing costs. The ICE’s trade-weighted Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, fell 0.5 percent to 83.401. It dropped 4.1 percent last week, the biggest decrease since September 1985, when the U.S., U.K., France, Japan and West Germany agreed at New York’s Plaza Hotel to coordinate the devaluation of the dollar against the yen and the deutsche mark. Australia, New Zealand The Australian and New Zealand dollars strengthened the most among the 16 most-active currencies against the yen as Asian equities climbed, prompting investors to buy higher- yielding assets. “Japan’s stock market is strengthening, which probably reflects optimism over the U.S. toxic-asset plan,” said Ryohei Muramatsu, manager of Group Treasury Asia at Commerzbank AG in Tokyo. “The yen is likely to be sold.” The Nikkei 225 Stock Average rose 2 percent and the MSCI Asia-Pacific Index of regional shares gained 2.3 percent. The benchmark interest rate is 0.1 percent in Japan, compared with 3.25 percent in Australia and 3 percent in New Zealand, encouraging Japanese investors to seek higher returns abroad. Japan’s currency weakened against the euro for a second day after a government survey showed confidence among Japanese manufacturers fell the most on record this quarter, diminishing the currency’s allure as a shelter from the financial crisis. ‘Still Deteriorating’ “Japan’s fundamentals including its economy are still deteriorating, casting doubt over the appeal of its currency,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “The trend for the yen is to weaken” to 131.05 per euro and 96.25 against the dollar today, he said. The Cabinet Office and Finance Ministry said in Tokyo today that sentiment among large manufacturers was minus 66 points this quarter compared with minus 44.5 points three months earlier. A negative number means pessimists outnumber optimists. The government began compiling the report in 2004. Demand for the euro also increased after European Central Bank President Jean-Claude Trichet said in an interview with the Wall Street Journal that zero interest rates have “drawbacks” and would not be “appropriate.” “The ECB is most reluctant to lowering interest rates,” said Yuji Saito,” Tokyo-based head of the foreign-exchange group at Societe Generale SA, France’s third-largest bank. This, combined by an additional support measure for eastern Europe, “should support the euro,” he said. Currency of Choice JPMorgan Chase & Co., Morgan Stanley and Citigroup Inc. are advising investors to buy euros. Traders are looking past forecasts from Germany’s Kiel- based IfW institute for the European Union economy to shrink 3.3 percent this year, and snapping up currencies where central bankers are resisting calls to purchase debt securities as a way of lowering interest rates and pumping cash into their financial systems. Those options are becoming scarce after Federal Reserve Chairman Bernanke joined the Bank of England, Bank of Japan and Swiss National Bank in so-called quantitative easing. “The dollar is a sell near term versus those currencies where quantitative easing is off the table,” said John Normand, head of currency strategy at JPMorgan in London. “The top on euro-dollar will come when the ECB looks likely to join the quantitative easing crowd. For now, it’s content to stay on the sidelines.”

Source