Yen Falls for Second Day Against Dollar After Fed Rescue of AIG

By Ron Harui and Stanley White

Sept. 17 (Bloomberg) -- The yen fell for a second day against the dollar after the Federal Reserve said it will lend as much as $85 billion to American International Group Inc., helping prevent credit markets from seizing up.

Japan's currency also dropped versus the Australian and New Zealand dollars on speculation an AIG rescue will encourage investors to resume taking out loans in Japan to buy higher- yielding assets elsewhere. The yen jumped the most in a decade against the greenback on Sept. 15 as mounting credit-market losses forced Lehman Brothers Holdings Inc. to file the biggest bankruptcy in history, sparking a global stocks rout.

The Fed's loan is ``likely to support the U.S. financial system and avert a catastrophe,'' said Kenichiro Ikezawa, who helps oversee the equivalent of about $3 billion as a fund manager at Daiwa SB Investments Ltd. in Tokyo. ``Risk-taking appetite will probably recover a bit. Sentiment toward the dollar isn't bad, and the yen may be sold.''

Japan's currency fell 0.4 percent to 106.06 per dollar at 1:52 p.m. in Tokyo, after sliding 0.9 percent yesterday and surging 3.1 percent on Sept. 15. Against the euro, the yen slid 0.6 percent to 150.22. It touched 147.04 yesterday, the strongest since August 2006. The dollar fell 0.2 percent to $1.4158 per euro.

Australia's dollar rose 2.5 percent to 84.41 yen from late in Asia yesterday, and New Zealand's dollar climbed 2.9 percent to 69.85 yen. The Nikkei 225 Stock Average advanced 1.3 percent, after a 5 percent drop yesterday.

Carry Trades

``A disorderly failure of AIG could add to already significant levels of financial market fragility,'' the Fed said, explaining its decision to lend money to AIG in return for a 79.9 percent stake.

Benchmark interest rates of 7 percent in Australia, 7.5 percent in New Zealand, 8.25 percent in Mexico and 13.75 percent in Brazil compare with 0.5 percent in Japan, making the currencies favorites for so-called carry trades. The Bank of Japan today left its overnight rate unchanged for a 22nd straight policy meeting.

In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher rates, earning the spread between the two. The yen declined 0.3 percent to 58.6007 against the Brazilian real and weakened 0.5 percent to 9.910 versus the Mexican peso.

``The news is lifting shares and calming investors,'' said Toshihiko Sakai, head of trading in foreign-exchange and financial products at Mitsubishi UFJ Trust & Banking Corp. in Tokyo. ``They are selling the yen.''

Lower Volatility

Implied volatility on one-month dollar-yen options fell to 16.95 percent today from 17.65 percent yesterday when it touched 19.50 percent, the highest since March 17. Lower volatility may encourage carry trades as it indicates a smaller risk of exchange-rate fluctuations.

Fed Chairman Ben S. Bernanke and his colleagues yesterday rebuffed calls by some investors for an interest-rate cut after Lehman filed for bankruptcy, signaling they will continue to address market turmoil with emergency lending and aim monetary policy at a longer-term economic forecast that may still show the economy is skirting a recession. The benchmark rate was kept at 2 percent.

Further losses in the yen may be limited by speculation Japanese investors will repatriate funds ahead of the Sept. 30 halfway point of Japan's fiscal year, according to Tomoko Fujii, head of economics and strategy at Bank of America Corp. in Tokyo.

`Upside Risks'

``The approach of the Japanese fiscal half-year end will keep domestic financial institutions sidelined in their foreign asset investment or may even foster repatriation,'' Fujii wrote in a research note yesterday. ``Upside risks to the yen will probably persist in coming weeks.''

Bank of America raised its yen forecasts, predicting the currency will trade at 104 per dollar at the end of September and 107 at the end of December. That compares with previous estimates of 108 and 110, respectively, Fujii said.

Any gains in the pound and the euro may be limited by speculation European central banks will lower interest rates in coming months as a U.S. economic slowdown spreads through other countries. The U.K. currency fell 0.1 percent to $1.7847.

The Bank of England will release minutes from its meeting ended Sept. 6 at 9:30 a.m. in London. BOE policy makers kept the benchmark 5 percent rate unchanged at that meeting. BOE Governor Mervyn King said yesterday inflation will peak ``soon'' and then slow ``sharply'' in 2009.

Weaker Pound, Euro

Economists surveyed by Bloomberg forecast that the European Central Bank will keep its benchmark rate on hold at 4.25 percent this year before cutting it in the first quarter of 2009.

``The pound and the euro will be hit more as more weakness spreads through Europe,'' said Thomas Harr, a senior currency strategist in Singapore at Standard Chartered Plc, the U.K. bank that gets most of its profit from Asia. ``The BOE will start cutting rates quite significantly from the fourth quarter. The ECB will have to follow.''

The pound may fall to $1.58 and the euro may decline to $1.30 by the middle of next year, Harr said.

To contact the reporter on this story: Ron Harui in Tokyo at rharui@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net

Last Updated: September 17, 2008 00:55 EDT