Yen Rises on Concern U.S. Bank Rescue Plan Won't Stop Recession

By Ron Harui and Stanley White

Oct. 15 (Bloomberg) -- The yen rose for the first day in five against the dollar on speculation the U.S. Treasury's plan to inject $250 billion into financial institutions to revive lending won't prevent a recession in the world's biggest economy.

Japan's currency also gained versus the Australian and New Zealand dollars U.S. and Asian stocks fell, damping investors' confidence in higher-yielding assets. The U.S. dollar may weaken before data that economists predict will show the nation's retail sales fell at a faster pace as job losses and a housing slump hurt consumption.

``The yen could get support from the stock market decline as it shows investors aren't completely ready to take on risk,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``The outlook for the U.S. economy doesn't look good, and this will drag the dollar lower.''

The yen traded at 101.26 per dollar at 10:14 a.m. in Tokyo from 102.07 late yesterday in New York. The currency rose to 137.32 per euro from 139.04, set for the biggest gain in a week. The euro fell to $1.3566 from $1.3619.

The Australian dollar fell 5.9 percent to 69.84 yen from late yesterday in Asia, while the New Zealand dollar declined by 4.4 percent to 62.11 yen. The South Pacific nations' assets are favorites of so-called carry trades, in which investors borrow in currencies with low interest rates and invest in nations with higher rates. Japan's target rate of 0.5 percent is the lowest among major economies.

Volatility Rises

Japan's currency also gained as volatility implied by one- month dollar-yen options climbed to 21.35 percent from 20.54 percent yesterday, indicating a larger risk of exchange-rate fluctuations that may erode profits on carry trades.

Treasury Secretary Henry Paulson yesterday urged banks receiving capital injections to use the funds to spur economic growth. People familiar with the plan said nine financial institutions, including Citigroup Inc. and Goldman Sachs Group Inc., will get $125 billion. European countries committed $1.8 trillion on Oct. 13 to guarantee loans and invest in lenders.

The yen snapped two days of losses versus the euro as the MSCI Asia-Pacific Index of regional shares slipped 1.3 percent after the Standard & Poor's 500 Index lost 0.5 percent yesterday. The yen climbed 9 percent versus the euro this month as mounting credit-market losses encouraged investors to shed higher- yielding assets funded by low-cost loans in Japan.

``Japan isn't as adversely affected, like the U.S. is, by the crisis,'' said Kenichi Yumoto, head of foreign-exchange sales at Societe Generale SA in Tokyo. ``The yen is a safe-haven currency and is likely to be bought.''

U.S. Retail Sales

The dollar yesterday reached a one-week high of 103.07 yen, before retreating on concern U.S. government reports will show that the economic slowdown is deepening.

U.S. retail sales fell 0.7 percent in September following a 0.3 percent decline the prior month, according to the median estimate of economists surveyed by Bloomberg News. The Commerce Department will release the data at 8:30 a.m. in Washington. Figures on Oct. 17 may show housing starts fell to a 17-year low.

``Concerns over a U.S. recession may now intensify, as those over a financial crisis have abated for the time being,'' said Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland in Tokyo and a former Bank of Japan currency trader. ``These worries may lead to dollar selling, yen buying.''

Money Markets

The U.S. currency also may weaken as the London interbank offered rate, or Libor, for three-month dollar loans dropped 12 basis points yesterday to 4.64 percent, reflecting increased willingness of banks to lend to each other. It was at 4.82 percent on Oct. 10, the highest level since December.

The dollar rose to the highest level versus the euro since March 2007 on Oct. 10, partly because banks' reluctance to lend to each other spurred a surge in demand for U.S. currency funding in global money markets.

The Bank of Japan said yesterday it will offer lenders an unlimited amount of dollars, one day after the Federal Reserve said the European Central Bank, Bank of England and Swiss National Bank would offer European banks as many dollars as they want at fixed interest rates against ``appropriate collateral.''

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

Last Updated: October 14, 2008 21:25 EDT