By Yasuhiko Seki and Ron Harui July 22 (Bloomberg) -- The yen and the dollar strengthened for a second day against the euro on concern the recovery of the global banking industry from the financial turmoil will be delayed, boosting demand for safer assets. Japan’s currency rose the most versus South Africa’s rand and the British pound after U.S. commercial lender CIT Group Inc. said its “existing liquidity” was not enough to repay maturing notes and the Daily Telegraph reported Barclays Plc and Royal Bank of Scotland Group Plc may need additional funds to expand. The pound dropped for a second day after an industry group said the U.K. house-price slump will persist, backing the case for the central bank to keep borrowing costs low. “Investors are still nervous about news or developments that relate closely to the financial crisis,” said Shinichi Hayashi, a Tokyo-based dealer at Shinkin Central Bank, the central institution for Japan’s financial cooperatives. “The CIT issue and Telegraph article gave them a good excuse to unwind short positions on the yen.” A short position is a bet an asset will fall. The yen strengthened to 133.01 per euro as of 7:50 a.m. in London from 133.36 in New York yesterday, when it gained 0.5 percent. Japan’s currency climbed to 93.65 versus the dollar from 93.73. The dollar rose to $1.4204 per euro from $1.4226. The pound dropped to $1.6363 from $1.6459 yesterday, and weakened to 153.22 yen from 154.32 yen. The rand declined to 11.961 yen from 12.011 yen. CIT Concern The dollar strengthened against 13 of the 16 most traded currencies after CIT said yesterday it expected to post a loss of more than $1.5 billion for the second quarter, renewing concern the lender may have to file for bankruptcy. Credit-default swaps protecting against a CIT default for five years climbed 6.5 percentage points to 47 percent, according to broker Phoenix Partners Group. The cost implies that traders have priced in an almost 95 percent chance that the lender will default within the next five years. “Worries over a possible insolvency of CIT appear to be returning,” said Akifumi Uchida, a Tokyo-based deputy general manager of the marketing unit at Sumitomo Trust & Banking Co., Japan’s fifth-largest bank. “This is a minus for sentiment and may cause buying of the yen versus the dollar and the dollar against European currencies.” The yen gained versus all the most-active currencies after the Telegraph reported that Barclays will need another 12.8 billion pounds ($20.9 billion) and Royal Bank of Scotland will require an additional 8.5 billion pounds to expand under new regulatory rules. The U.K. newspaper cited an analyst at JPMorgan Securities Ltd. ‘Not Fully Over’ “The Telegraph story came as a reminder that the financial crisis is not fully over,” said Shuzo Kakuta, senior foreign exchange advisor at Tokyo Tomin Bank Ltd. “This kind of topic is positive for the yen both against the dollar and cross- currencies” such as the Australian dollar. The Australian and New Zealand dollars dropped for the first time in three days against the greenback after Federal Reserve Chairman Ben S. Bernanke said financial markets remained “stressed,” encouraging demand for safer assets. Household spending is an “important” risk to the outlook because of continued job losses and declines in home values, Bernanke said yesterday on the first day of a two-day congressional testimony in Washington. ‘Risk Aversion’ “A bit of risk aversion is creeping back into the market,” said Thomas Harr, a currency strategist at Standard Chartered Plc in Singapore. Bernanke “was more dovish on the economy and on the economic recovery and a little bit of risk has been taken off the table which is weakening the Aussie.” Australia’s dollar fell 0.4 percent to 76.37 yen and slipped 0.3 percent to 81.56 U.S. cents. New Zealand’s dollar weakened 0.5 percent to 61.37 yen and declined 0.4 percent to 65.54 cents. The pound dropped against all of the 16 major currencies after the National Institute of Economic and Social Research said today that home values will resume their decline because recent gains were driven by a lack of available homes. The institute also predicted gross domestic product will keep falling until the final quarter of this year. It forecast GDP will shrink 0.4 percent in the second quarter. The median estimate of economists in a Bloomberg News survey is for a 0.3 percent drop. The Office for National Statistics will release the data on July 24. “All of this is not good news for Britain,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “This is leading to selling of the pound.” Gains in the Japanese and U.S. currencies were tempered on speculation an advance in Asian stocks will spur investors to increase holdings of higher-yielding assets. The Nikkei 225 Stock Average rose 0.7 percent and the MSCI Asia-Pacific Index of regional shares climbed 0.6 percent. “Rising equities are likely to lead to selling of the yen,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “The stock markets are considered to be a barometer of risk appetite.” To contact the reporters on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.

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