Yen Drops Most in 3 Months as U.S. Takes Over Fannie, Freddie

By Agnes Lovasz and Stanley White

Sept. 8 (Bloomberg) -- The yen fell by the most in three months against the euro and dropped versus the dollar as the U.S. government's takeover of Fannie Mae and Freddie Mac prompted investors to buy higher-yielding assets.

The yen slumped by the most in six months against the Australian and New Zealand dollars, two favorites of so-called carry trades, as stocks rose on speculation support for the two mortgage companies will stem a crisis that has caused more than $500 billion of losses and writedowns. The dollar advanced against the euro for an eighth day.

``All equity markets are firmly higher on the Fannie and Freddie development and risk appetite is receiving a boost,'' said Michael Klawitter, a currency strategist with Dresdner Kleinwort in Frankfurt. ``All the yen crosses are being pushed higher on the back of this.''

The yen fell as much as 2.2 percent to 157 per euro, before trading at 154.18 at 10:14 a.m. in London, from 153.67 in New York on Sept. 5. It declined to 108.57 versus the dollar from 107.73. The euro was at $1.4214, from $1.4267. The pound advanced to $1.7694 from $1.7661. Against the dollar, the yen will fall to 109 yen, Klawitter said.

Against the Australian dollar, the yen fell 1.6 percent to 89.34, from 87.91 in New York on Sept. 5. It declined 3.5 percent to 74.38 per New Zealand dollar.

Carry Trades

Japan's currency often falls when demand for higher- yielding assets rises, as traders reverse carry trades. In such trades, investors get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's 0.5 percent benchmark interest rate compares with 2 percent in the U.S., 4.25 percent in Europe, 7 percent in Australia and 8 percent in New Zealand. The risk to carry trades is that currency moves erase profits.

The South Korean won rose 3.3 percent to 1,081.20 per dollar, its biggest gain since January 1999, as speculation eased that the country is headed for a repeat of the 1997 currency crisis.

The U.S. government seized control of Fannie Mae and Freddie Mac yesterday after the biggest surge in mortgage defaults in at least three decades threatened to topple the companies making up almost half the U.S. home-loan market.

The Treasury can buy as much as $100 billion of a special class of stock in each company as needed to maintain their positive net worth. It will also provide secured short-term funding to Fannie, Freddie and 12 federal home-loan banks, and purchase mortgage-backed debt in the open market.

Bonds, Stocks

Treasuries tumbled, with 10-year yields rising the most in almost two months. Japanese 10-year bond yields climbed to a one-month high. Asian stocks rose from the lowest in two years and futures on the Standard & Poor's 500 Index jumped 3 percent.

Standard & Poor's said yesterday the rescue of Fannie and Freddie won't change its AAA rating for U.S. debt, its highest credit grade.

``The yen is likely to take a hit,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``A government bailout will certainly stabilize Freddie and Fannie and improve risk appetite for carry trades.''

The yen may decline to 109.20 versus the dollar today, he said.

Futures traders increased bets that the euro will decline against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission show.

Currency Futures

The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain -- so-called net shorts -- was 38,623 on Sept. 2, compared with net shorts of 33,778 a week earlier.

The dollar declined against the euro and the pound on speculation U.S. consumer spending will falter as the labor market weakens.

U.S. retail sales excluding cars and trucks probably dropped 0.2 percent in August, the first decline since February, according to the median projection in a Bloomberg News survey, after a 0.4 percent gain in July. The Commerce Department is scheduled to release the retail sales report on Sept. 12.

Pending sales of previously owned U.S. homes fell 1.3 percent in July after rising 5.3 percent in the previous month, data due tomorrow may show, according to a separate survey.

The U.S. lost more jobs than forecast in August and the unemployment rate climbed to a five-year high, data on Sept. 5 showed.

U.S. Economy

``The dollar still stands to weaken against major currencies,'' said Osamu Takashima, chief analyst for global market sales and trading in Tokyo at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan's largest publicly listed bank. ``The U.S. economy is worsening. The Fed's benchmark rate is justified given the labor market outlook.''

The dollar may decline to $1.47 against the euro this month, he said.

The dollar also weakened as energy prices rose. Crude gained 1 percent to $107.29 a barrel as the approach of Hurricane Ike delayed oil production from restarting in the Gulf of Mexico.

The euro-dollar exchange rate and oil had a correlation of 0.9 in the past year, according to Bloomberg calculations. A reading of 1 would mean they moved in lockstep. Oil prices slid 8 percent last week and the dollar rose 2.8 percent against the euro.

Crude Oil

``Oil price gains are helping the dollar go lower,'' said Gerrard Katz, head of foreign-exchange trading in Hong Kong at Standard Chartered Plc, the U.K. bank that gets most of its profit from Asia. ``The market feels a bit caught out because we unwound so many risk aversion trades last week. Oil and higher- yielding currencies should be supported.''

The dollar may decline to $1.4480 per euro today, he said.

Charts show the U.S. currency may rise to 109.20 yen this week, said Pak Lai Ng, a technical analyst at Forecast Singapore Pte.

The U.S. currency is poised to gain after forming a so- called hammer on its candlestick chart on Sept. 5, which often indicates the reversal of a decline, Ng said. First resistance at 109.20 yen is near last week's high, he said. The dollar may advance to second resistance at 110 yen on a break of first resistance, according to Ng.

To contact the reporter on this story: Agnes Lovasz in London at alovasz@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net

Last Updated: September 8, 2008 05:28 EDT