Yen Falls Fourth Day on Treasury Plan to Invest in U.S. Banks

By Stanley White and Ron Harui

Oct. 14 (Bloomberg) -- The yen fell for a fourth day against the dollar as the U.S. Treasury prepared to acquire stakes in banks, encouraging investors to add to holdings of high-yielding assets funded in the Japanese currency.

The yen also slid against the Australian and New Zealand dollars, two favorites of so-called carry trades, on reports the Treasury will buy preferred shares in banks including Citigroup Inc., JPMorgan Chase & Co. and Morgan Stanley. The euro and the pound rose against the dollar after European countries committed $1.8 trillion to guarantee bank loans.

``Policy makers are gradually restoring confidence in banks and credit markets,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``This promotes risk-taking activity that is likely to weaken the yen.''

The yen fell to 102.60 per dollar at 11:40 a.m. in Tokyo from 102.01 late yesterday in New York, on course for its longest losing streak in three months. Against the euro, the yen declined to 140.21 from 138.57. The euro rose to $1.3665 from $1.3581. The pound advanced to $1.7498 from $1.7341.

Against the Australian dollar, the yen plunged 6.9 percent to 72.56 from 67.57 late yesterday in Asia. Japan's currency fell 4.2 percent versus the New Zealand dollar to 63.60. South Korea's won climbed 4.5 percent to 11.7852 versus the yen.

Stock Rally

Japan's currency has gained 17 percent versus the Australian dollar and 12 percent against the New Zealand dollar this month as credit-market losses prompted investors to reduce carry trades. Japan's benchmark rate is 0.5 percent, compared with 6 percent in Australia and 7.5 percent in New Zealand.

In carry trades, investors get funds in nations such as Japan that have low borrowing costs and buy assets where returns are higher. The risk is that currency moves erase the profits. Volatility implied by one-month dollar options against Japan's currency declined yesterday by the most in almost 13 years.

``Volatility has been falling broadly as we move out of a panic mode as the foundation in the financial system had been shaken to the core,'' wrote analysts led by Hans-Guenter Redeker, London-based global head of foreign-exchange strategy at BNP Paribas SA, in a research note yesterday. ``We expect risk appetite to stay strong, putting yen crosses under pressure.''

Implied volatility on one-month dollar-yen options dropped to 21.38 percent today from 23.67 percent yesterday, when it tumbled by 5.97 percentage points, the most since Bloomberg began compiling the data in December 1995.

`Panic Situation'

Shares rallied, with The Nikkei 225 Stock Average surging 13 percent, set for the biggest gain since 1990. The Standard & Poor's 500 Index yesterday rose by the most in seven decades.

``The governments have gotten rid of the panic situation, which is very good,'' said Toru Umemoto, chief currency analyst at Barclays Capital in Tokyo. The yen may decline to 103 against the dollar in the coming week, he said.

The Bush administration will spend about half of a total of $250 billion for stakes in banks, people briefed on the matter said. The banks are Citigroup, Wells Fargo & Co., JPMorgan, Bank of America Corp., Goldman Sachs Group Inc., Morgan Stanley, State Street Corp., and Bank of New York Mellon Corp., they said. Treasury Secretary Henry Paulson is scheduled to hold a press conference at 8:30 a.m. in Washington.

The move by policy makers ``is not going to avoid a sharp global recession, but it's averting something a lot worse,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``Risky assets are performing well today. I won't fight it.''

Money Markets

Japan and Australia pumped $12.9 billion into money markets after European leaders agreed to guarantee new debt from financial institutions and use taxpayers' money to keep lenders afloat.

Australian banks' borrowing costs eased today, according to a gauge that measures the availability of funds. The difference between the rate banks charge each other for three-month loans and the overnight indexed swap rate stood at 84.67 basis points, or 0.847 percentage point, from 1.0317 percent yesterday. The gap has averaged 47 points this year.

Losses in the dollar accelerated against the euro after the Fed said yesterday the European Central Bank, the Bank of England and the Swiss National Bank will offer financial institutions unlimited funds in the U.S. currency, providing easier access to dollars in response to demand for loans.

The London interbank offered rate, or Libor, for three- month dollar loans dropped 7 basis points to 4.75 percent yesterday, the British Bankers' Association said.

Japan's Response

Japan may halt sales of government-held shares to help protect financial markets from the global credit crisis, Finance Minister Shoichi Nakagawa said in a statement today.

Japan will also take steps to tighten restrictions on short-selling while relaxing regulations on share buybacks to limit the spread of the global financial crisis.

``Measures from Japan could lead to a further rebound in stocks and help stabilize financial markets,'' said Kengo Suzuki, currency strategist at Shinko Securities Co. in Tokyo. ``This could actually weaken the yen on an increase in risk appetite.''

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

Last Updated: October 13, 2008 22:51 EDT