BLBG: Yen Drops to Five-Month Low Versus Euro as Investors Seek Yield
The yen fell to a five-month low against the euro as U.S. plans to help banks dispose of toxic assets spurred investor appetite for higher-yielding currencies.
The dollar traded near a two-month low versus the euro after Treasury Secretary Timothy Geithner unveiled proposals to purchase as much as $1 trillion of illiquid bank assets, sapping demand for the safety of the Japanese and U.S. currencies. South Korea’s won, Australia’s dollar and Britain’s pound rose for a third day against the yen as stocks rallied around the world on optimism the worst of the financial turmoil may be over.
“Equity markets are rebounding on the back of Geithner’s plan and that’s providing support for higher-yielding currencies, which is negative for the yen,” said Ian Stannard, a currency strategist at BNP Paribas SA in London. “Some broad- based yen weakness is now in play. As long as this optimism holds up, we’ll break through 100 yen per dollar this week.”
The yen weakened to 133.60 per euro as of 9:17 a.m. in London, from 132.17 yesterday in New York. It earlier touched 134.51, the lowest level since Oct. 21. Japan’s currency also slipped to 98.19 per dollar from 96.95.
The dollar traded at $1.3610 per euro from $1.3633 yesterday. The greenback reached $1.3738 on March 19, the lowest level since Jan. 9. The dollar depreciated to $1.4713 per pound from $1.4572, after sliding to $1.4735, its weakest level since Feb. 10.
Demand for Yield
The yen slid against all 16 most-traded currencies amid speculation the stock rally will spur investors to purchase higher-yielding assets overseas. Japan’s benchmark interest rate is 0.1 percent, compared with 1.5 percent in the euro region, and 3.25 percent in Australia.
“Active policy steps by the U.S. government tentatively weaken demand for safe currencies,” said Akira Takei, who helps oversee the equivalent of $42.5 billion as head of non-yen bonds in Tokyo at Mizuho Asset Management Co., a unit of Japan’s second-largest bank. “Capital inflows into the currencies of emerging markets are rising.”
South Korea’s won advanced 1.9 percent to 14.08 versus the yen, Australia’s dollar climbed 1.2 percent to 69.16 yen and the pound appreciated 2.8 percent to 144.08 yen. The U.K. currency reached 144.91 yen, the highest since Dec. 1.
The Nikkei 225 Stock Average rose 3.3 percent, its sixth gain in seven days, and the MSCI World Index advanced 0.8 percent.
“Shares in the region are rising, suggesting improving risk-taking appetite among investors,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “Japan’s fundamentals are deteriorating. The yen will probably be sold.”
Trade Deficit
Japan’s currency also declined for a third day against the dollar on concern a government report tomorrow will show the economy posted a trade deficit for a fifth month, suggesting reduced demand for the nation’s exports.
The Finance Ministry may say the custom-cleared trade shortfall was 20 billion yen ($203 million) in February, compared with a record 956.9 billion yen in January, according to a Bloomberg News survey of economists.
The yen fell versus 15 of the 16 major currencies this quarter, dropping the most versus Norway’s krone and Brazil’s real. Against the yen, the krone surged 20 percent to 15.6492 and the real climbed 12 percent to 43.7271.
The Dollar Index, which the ICE uses to track the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, gained 0.1 percent today to 83.496. The gauge is down 5.1 percent this month. The Fed said on March 18 it would buy as much as $300 billion of Treasuries and increase purchases of agency mortgage-backed securities to keep borrowing costs down.
‘Under Pressure’
“For now, the dollar should remain under pressure,” Ashley Davies, a Singapore-based currency strategist at UBS AG, wrote in a note today. “The dollar was undermined last week by the Fed’s action.”
Investors should buy the British pound against the yen on speculation the U.K. government’s strategy of pumping money into the financial system will boost financial shares, according to BNP Paribas SA.
The Bank of England bought 7 billion pounds ($10 billion) of gilts in the week through March 19 with newly created money using its Asset Purchase Facility. The central bank’s so-called quantitative easing has helped reduce the cost of protecting U.K. government bonds from default and is “positive” for assets such as stocks and commodities, analysts at BNP Paribas, France’s largest bank, wrote in a research note yesterday.
Improving Appetite
“Sterling-yen should perform pretty well as long as equities rally and risk appetite improves,” Sharada Selvanathan, a currency strategist in Hong Kong at BNP Paribas, said in an interview, confirming the note. “There could also be some flows leaving Japan as investors look outside for investment opportunities.”
Credit default swaps on U.K. government debt dropped to 113.64 basis points yesterday from 122.00 basis points on March 20, according to CMA Datavision prices.
Demand for the euro may weaken after European Central Bank President Jean-Claude Trichet said interest rates may be cut further as the bank works to counter the global economic slump.
“Our main policy rates are not at their lowest level and they could diminish further,” Trichet said in a speech yesterday in Mexico City.
“While the euro is now enjoying a strong rally on hopes for a stabilization of credit markets, the currency looks to be hostage to potential downside risks,” said Yasuhide Yajima, senior economist in Tokyo at NLI Research Institute Ltd., a unit of Japan’s second-largest life insurer. “Given the fragile banking system in Europe and the recession, the ECB may need to ease monetary policy further, boding ill for the euro.”
The 14-day relative strength index on the 16-nation currency versus the greenback, a gauge used by traders to project trends, was at 70.023 today, down from 71.449 yesterday. A level above 70 typically signals an asset is poised to fall.
