BLBG: Yen Falls as Stock Gains, Bank Bailouts Increase Risk Appetite
The yen fell the most in eight weeks against the euro on speculation stock gains and measures to stabilize the U.S. financial system will prompt investors to sell the Japanese currency and buy higher-yielding assets.
The yen also weakened versus the U.S., Australian and New Zealand dollars as the U.S. government agreed to provide $138 billion of funds and guarantees to Bank of America Corp. and the U.S. Senate released $350 billion to rescue troubled banks. Asian and European shares and U.S. stock futures extended gains amid confidence that governments will support financial markets.
“We clearly see some unwinding of risk-aversion trades on the back of the news and that’s weighing on the yen,” said Michael Klawitter, a currency strategist with Dresdner Kleinwort in Frankfurt. “But it’s way too early to become optimistic and it’s difficult to see how the overall trend of risk aversion can reverse here.”
The yen weakened to 120.53 per euro as of 6:36 a.m. in New York from 117.87 yesterday. The dollar strengthened to 90.65 yen from 89.84 yen. The euro bought $1.3295 from $1.3115. The Japanese currency’s drop pared this week’s gain versus the euro to 1.5 percent and erased the appreciation against the dollar.
The yen may strengthen to 82 per dollar and 112 a euro in four weeks as declining earnings convince investors financial institutions will suffer as much from the economic slump as from the credit crisis, Klawitter said.
Rising Stocks
Against the Australian dollar, the yen slipped to 60.75 from 59.55. Japan’s currency also fell to 49.36 versus New Zealand’s dollar from 48.28. It weakened to 9.1136 per South African rand from 8.9936. Benchmark interest rates are 4.25 percent in Australia, 5 percent in New Zealand, 11.5 percent in South Africa and 0.1 percent in Japan.
The MSCI World Index rallied 1.5 percent. Standard & Poor’s 500 Index futures advanced 1.3 percent.
“Sentiment has improved on this news but previous bouts of bailouts haven’t led to sustained confidence in the outlook,” Emma Lawson, a currency strategist in London at Merrill Lynch & Co., wrote in a report today. “Markets are likely to fade the enthusiasm.”
The yen rose to 113.64 per euro on Oct. 27, the strongest since 2002, as coordinated rate cuts by major central banks on Oct. 8 and financial-system bailouts in the U.S. and Europe failed to revive stock markets.
Bank Losses
The U.S. government agreed to invest in Bank of America to stabilize the company, the Treasury, Federal Reserve and Federal Deposit Insurance Corp. said in a joint e-mailed statement before the bank’s quarterly earnings report today.
The yen remained lower even as Bank of America, the largest U.S. bank by assets, today posted its first loss since 1991 and Citigroup Inc. reported an $8.29 billion fourth-quarter loss.
The world’s largest banks have posted losses and writedowns of about $1 trillion since the start of 2007 on mortgage-related securities, according to data compiled by Bloomberg.
Fed officials are focusing on the option of setting up a so-called bad bank that would acquire hundreds of billions of dollars of troubled securities now held by lenders, according to people who’ve discussed the financial outlook with advisers to U.S. President-elect Barack Obama. That may allow banks to reduce write-offs, free up capital and begin to increase lending. Obama takes office on Jan. 20.
Record Low
The euro fell 1.8 percent against the dollar this week and headed for the third weekly loss, its longest losing streak in almost two months, after European Central Bank President Jean- Claude Trichet signaled he may cut interest rates further.
“A strong dollar and a strong yen was the theme of the week so people now use this news to lighten up their portfolios and that means buying the euro again,” said Paul Robson, a London-based currency strategist at the Royal Bank of Scotland Group Plc.
Robson sees the yen falling to as low as 122 versus the euro today. The euro gained 0.6 percent versus the Swiss franc.
The ECB isn’t planning to cut borrowing costs to zero percent, Trichet said in an interview with Japanese public broadcaster NHK. The ECB’s benchmark rate compares with 1.5 percent in the U.K. and a range of zero to 0.25 percent in the U.S., a record low.
“We didn’t say that it was now the limit and we wouldn’t move any more,” Trichet told reporters in Frankfurt yesterday after the central bank lowered its main refinancing rate by a half-percentage point to 2 percent, matching a record low.
Russia’s ruble slid to a record low of 32.5897 per dollar after the central bank accelerated its devaluation of the currency to stem the drain on its foreign-exchange reserves.
Dollar Gains
The dollar may extend gains versus the yen on speculation overseas investors are seeking the relative safety of Treasuries as an economic slowdown spreads across the world.
Foreign investors bought $15 billion more long-term U.S. stocks, notes and bonds than they sold in November, 10 times more than the previous month, according to a Bloomberg News survey. The Treasury Department will release the data at 9 a.m. in Washington today.
“Treasuries are a kind of safe haven,” said Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland in Tokyo and a former Bank of Japan currency trader. “Foreigners’ net purchases may continue in the short term and be an additional factor for the dollar to rise.”
