Dollar May Rise Versus Yen on Fed’s Resolve to Revive Economy

By Stanley White and Ye Xie

Jan. 29 (Bloomberg) -- The dollar may rise for a second day against the yen as the Federal Reserve resolved at yesterday’s policy meeting to do whatever is needed to revive lending and boost the world’s largest economy.

New Zealand’s dollar declined after the Reserve Bank cut the official cash rate more than most analysts forecast to a record low of 3.5 percent. Billionaire George Soros, who made $1 billion selling the pound in 1992, told reporters at the World Economic Forum in Davos, Switzerland, he’s no longer betting against the currency after it dropped to $1.40.

“The dollar can squeeze higher against the yen,” said Osao Iizuka, head of currency trading in Tokyo at Sumitomo Trust & Banking Co. “The Fed has laid out the framework for future policy, and that’s a relief. We’ll need to see how this benefits the real economy. Risk appetite may improve.” 

The dollar traded at 90.41 yen at 8 a.m. in Tokyo from 90.26 yen late yesterday in New York, when it reached a one-week high of 90.75 yen. The U.S. currency was little changed for a second day at $1.3152 per euro. The euro traded at 118.85 yen from 118.88 yen. The dollar may advance to 91 yen today, Iizuka said.

The Fed is “prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets,” the Federal Open Market Committee said in a statement after meeting in Washington. Policy makers maintained the target lending rate in a range of zero to 0.25 percent.

Fed on Treasuries 

Some analysts said the dollar erased losses versus the euro and pared its decline against the pound because the Fed failed to elaborate on its plan to buy long-term U.S. debt, which may increase the supply of the dollars and weaken the greenback.

“The fact that the Fed hasn’t committed to the purchase of long-term Treasuries is triggering a rally in the dollar,” said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. “This would be seen as expanding the money supply aggressively, and that would be a negative for the dollar. The lack of commitment on that front is easing some of the inflationary fears that have weighed on the dollar.”
New Zealand’s dollar traded at 52.36 U.S. cents from 52.41 cents late yesterday in New York. The kiwi, as the currency is known, touched 51.90 cents after the Reserve Bank cut its target lending rate by 1.5 percentage points, forecast by only three of 13 economists surveyed by Bloomberg News. The rest expected a reduction of 1 percentage point.

‘Bad Bank’ 

The Federal Deposit Insurance Corp., chaired by Sheila Bair, may manage a “bad bank” that would buy assets clogging banks’ balance sheets, two people familiar with the matter said. The initiative may allow the government to rewrite some of the mortgages that underpin bad debt.
The U.S. House mustered enough votes to pass President Barack Obama’s $819 billion stimulus package, aimed at lifting the economy out of recession through tax cuts and more than a half-trillion dollars in new spending.

The ICE’s Dollar Index, which tracks the dollar versus the euro, the yen, the pound, the Canadian dollar, the Swedish krona and the Swiss franc, increased 0.3 percent after advancing 6 percent in 2008.
The Fed cut its target lending rate on Dec. 16 to as low as zero and shifted its focus to the amount and type of debt it buys, seeking to revive credit markets. The central bank began this month a $500 billion program to buy Fannie Mae, Freddie Mac and Ginnie Mae mortgage securities, pushing down the yields on mortgage bonds relative to Treasury notes.

Trichet on Rates 

European Central Bank President Jean-Claude Trichet said in an interview on Bloomberg Television at the forum in Davos before the Fed’s announcement that “very, very low” interest rates “have some inconveniences.”
He reiterated that the ECB’s next important meeting is in March, signaling it won’t cut interest rates next week. The central bank lowered its benchmark interest rate on Jan. 15 by a half-percentage point to 2 percent, matching a record low.
Sterling bought $1.4242 from $1.4247 yesterday, when it rose to a one-week high of $1.4375. Concern eased that the U.K. will have to widen deficits to bail out the nation’s financial institutions. The pound plunged to $1.3503 on Jan. 23, the lowest level since September 1985, after the government announced a second bank bailout in three months.
Soros, who gained fame more than 16 years ago when he broke the Bank of England’s defense of the pound, told reporters in Davos he made money from the global financial crisis.
“I did actually foresee the fall in sterling, and that was one of the positions we carried,” Soros said. Below $1.40, “it seemed to me the risk-reward was no longer clear,” he said.
U.S. Treasury Secretary Timothy Geithner’s call for China to loosen restrictions on its currency drew criticism in Davos.
Allowing the yuan to strengthen would be “economic suicide” during an economic slump, Stephen Roach, chairman of Morgan Stanley Asia Ltd., told a panel.
China’s yuan increased 0.1 percent to 6.8443 per U.S. dollar yesterday.


To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net
Last Updated: January 28, 2009 18:33 EST