Yen Declines as U.S. Pledge on Banks Reduces Demand for Haven

By Ye Xie and Matthew Brown

Feb. 23 (Bloomberg) -- The yen fell to the lowest level against the dollar since December and dropped versus other major currencies as U.S. financial regulators pledged to inject more funds into domestic banks, reducing demand for a haven.

The currency may extend its decline as credit-default swaps gauging Japanese government bond risk surge. The pound gained for a third day against the dollar as a person familiar with the matter said Royal Bank of Scotland Group Plc plans to cut costs by more than 1 billion pounds ($1.44 billion).

“We are seeing very tentative risk appetite,” said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. “The talk of government increasing its stake in banks is positive for the day.” 

The dollar rose 1.2 percent to 94.48 yen at 11:04 a.m. in New York, from 93.35 on Feb. 20, and traded as high as 94.95, the strongest level since Dec. 1. The euro increased 0.5 percent to 120.31 yen from 119.68, touching 121.93, the highest level since Jan. 19. The euro fell 0.7 percent to $1.2737 from $1.2826 at the end of last week.
Sterling rose as much as 1.6 percent to $1.4662, the highest level since Feb. 10, after a person familiar with the situation said RBS will segregate toxic assets in a new unit as it prepares for a government insurance program to be announced this week. The pound gained 1.2 percent 87.80 pence per euro.

Yen Versus Rand 

The yen fell 2.2 percent to 9.44 versus South Africa’s rand and 2.2 percent to 137.74 against the pound after the U.S. Treasury and other regulators said in a joint statement in Washington today that the government “stands firmly behind the banking system during this period of financial strain,” encouraging Japanese investors to halt repatriation of assets.

U.S. financial regulators will begin examinations this week to determine if banks have enough capital, according to the statement. Citigroup Inc. and Bank of America Corp. jumped on the announcement after investors last week questioned their viability in the face of surging credit losses.
The cost of protecting Japanese government bonds more than doubled to 1.21 percent of the face value on Feb. 17, from 0.49 percent on Jan. 30, according to CMA Datavision. The yen dropped 2.7 percent against the dollar during that period.

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.

Traders are starting to use the speculative contracts blamed for fueling Wall Street’s meltdown last year to measure currency strength. 

Trichet on Credit 

The euro erased gains against the dollar after European Central Bank President Jean-Claude Trichet said in a speech to European securities regulators in Paris today that credit flows in the euro region are starting to decline. The financial system remains under “severe strain,” which is hampering economic recovery, Trichet said.
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.
Europe’s single currency rose 1.8 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.
Trichet said on Feb. 20 it’s a mistake to say the euro region has any weak links and rejected concern that the Irish economy is fragile.

Japan’s Deficit 

The yen fell to a five-week low against the euro before a government report this week forecast by economists to 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.
The yen headed for a 5 percent drop versus the dollar in February, its worst month since April 2004, after a government report 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.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Matthew Brown in London at mbrown42@bloomberg.net