Dollar, Yen Weaken on Speculation U.S. to Raise Citigroup Stake

By Ron Harui and Yasuhiko Seki

Feb. 23 (Bloomberg) -- The dollar and the yen fell against the euro on speculation the U.S. government will take larger stakes in domestic banks to shore up the nation’s financial system, helping revive demand for riskier assets.

The dollar declined for a third day versus the euro, the longest losing streak this year, after the Wall Street Journal reported the U.S. may raise its stake in Citigroup Inc., citing unidentified people familiar with the situation. Asian shares and U.S. stock futures gained. Europe’s single currency climbed for a fourth day against the yen on speculation European Central Bank President Jean-Claude Trichet and other board members will today signal confidence in the euro system.

“The Citigroup news is not a bad thing for the dollar if the reported action helps improve its credit-worthiness,” said Minoru Shioiri, senior foreign exchange manager in Tokyo at Mitsubishi UFJ Securities Co., the brokerage unit of Japan’s largest banking group. “Rising U.S. stock futures seem to support this view.”
The dollar dropped to $1.2965 per euro as of 7:47 a.m. in London from $1.2826 late in New York on Feb. 20. The yen declined to 120.73 per euro from 119.68. The U.S. currency slid to $1.4584 versus the pound from $1.4433, and declined to 1.1484 Swiss francs from 1.1560. The dollar was at 93.17 yen from 93.35 late last week.
Europe’s single currency traded at 88.99 British pence from 88.91 pence, and advanced to 1.4907 Swiss francs from 1.4820.

Stocks, Futures 

The U.S. government may end up holding as much as 40 percent of Citigroup’s common stock, while bank executives prefer the stake to be closer to 25 percent, the Wall Street Journal said.
The MSCI Asia Pacific index of shares gained after the Journal report, climbing 1.2 percent after earlier falling 1.1 percent. Futures on the U.S. Standard & Poor’s 500 Index rallied 1.6 percent.

Senate Banking Committee Chairman Christopher Dodd said on Feb. 20 that some banks may have to be taken over for “a short time.” His House counterpart, Financial Services Committee Chairman Barney Frank, along with Republican Senator Jon Kyl rejected having the government step in to run banks.
Citigroup and Bank of America Corp., which received $90 billion in U.S. aid in four months, each tumbled as much as 36 percent on Feb. 20 on concern the U.S. may take over the banks. The Obama administration in response said a “privately held” banking system is the “correct way to go.”
The ICE’s Dollar Index, which tracks the greenback against six major trading partners such as the euro and the yen, declined for a third day, falling 0.9 percent to 85.689.

ECB Speakers 

The euro also gained on speculation European policy makers speaking today will say they are considering further steps to address the region’s widening financial turmoil.
Citing problems recapitalizing banks in central and eastern Europe, U.K. Prime Minister Gordon Brown said yesterday the European Group of 20 leaders proposed the creation of a $500 billion fund to help increase the International Monetary Fund’s resources for crisis management.
“The euro was bolstered by continued expectations that the stronger eurozone economies would render assistance to the weaker European Union members,” Emmanuel Ng, an economist at Oversea-Chinese Banking Corp. in Singapore, wrote in a research note today.
Europe’s single currency has risen 3.3 percent versus the greenback since touching a three-month low of $1.2513 on Feb. 18, as concern surrounding European banking losses eased amid international efforts to address the problems.

Weak Links 

Trichet said on Feb. 20 that it’s a mistake to say the euro region has any weak links and rejected concern about fragility in the Irish economy. The ECB president will speak at the Securities Regulation Forum in Paris today, while ECB Executive Board member Jose Manuel Gonzalez-Paramo will appear at the fifth International Conference on ABC Europe and America.
The yen fell to a five-week low against the euro before a government report this week that economists say will show Japan posted a trade deficit for a fourth straight month.
“Japan’s trade balance is worsening, so the yen is losing some of its safe-haven status,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “There is a risk the yen may be sold” to 120.85 per euro today, he said.
The Finance Ministry’s custom-cleared trade balance statistics on Feb. 25 may show Japan posted a trade deficit of 1.18 trillion yen ($12.6 billion) in January, according to a Bloomberg News survey of 26 economists.

Default Swaps 

The yen is heading for its worst month against the dollar since April after government reports showed Japan is sinking deeper into recession, with fourth-quarter gross domestic product contracting at an annual rate of 12.7 percent, the most since the 1974 oil shock.
Since January, the correlation between the yen and the cost of protecting against a default on Japanese government bonds swung to negative 43 percent, showing investor concerns are increasing. The yen and cost of credit-default swaps moved in tandem 88 percent of the time last year.
“We wouldn’t really have looked at sovereign credit- default swaps in any great detail before” the September bankruptcy of Lehman Brothers Holdings Inc. caused credit markets to freeze, said Lee Hardman, a strategist in London at Bank of Tokyo-Mitsubishi UFJ Ltd. “It’s an area which potentially is going to see increasing focus as a driver of currency rates.”



To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net.
Last Updated: February 23, 2009 02:59 EST