Yen, Dollar Weaken as Investors Seek Higher-Yielding Assets

By Gavin Finch and Yasuhiko Seki

March 23 (Bloomberg) -- The yen fell to a five-month low against the euro and the dollar weakened on speculation additional U.S. government steps to help banks dispose of toxic assets will spur demand for higher-yielding currencies.

The dollar weakened after last week’s biggest drop since the 1985 Plaza Accord as U.S. Treasury Secretary Timothy Geithner prepared to announce details today of plans to expand the $700 billion rescue of the financial system by encouraging private investors to help purchase troubled assets from banks. The Australian and New Zealand dollars advanced for a 10th day versus the greenback and a second day against the yen as stocks rallied worldwide.

“The markets are looking at Geithner’s plan favorably,” said Geoffrey Yu, a London-based strategist at UBS AG, the world’s second-largest foreign-exchange trader. “We could well see the dollar push lower as risk appetite improves a bit.” 

The yen depreciated 1.4 percent to 132.10 per euro at 7:28 a.m. in New York, from 130.29 on March 20. It touched 131.97, the weakest level since Oct. 21. Japan’s currency declined 0.9 percent to 96.83 per dollar from 95.94. The dollar weakened 0.4 percent to $1.3641 per euro from $1.3582. The U.S. currency reached $1.3738 on March 19, the weakest since Jan. 9.

The administration of President Barack Obama will outline regulatory changes today aimed at avoiding a repeat of the financial crisis that has crippled the U.S. banking system. Geithner and Federal Reserve Chairman Ben S. Bernanke will testify at the House Financial Services Committee tomorrow on the government’s rescue of New York-based insurer American International Group Inc.
 

Emerging Markets 

Australia’s dollar rose 1.8 percent to 69.93 U.S. cents and 2.5 percent to 67.62 yen. New Zealand’s dollar advanced 1.6 percent to 56.78 U.S. cents and 2.4 percent to 54.91 yen.

“The launch of a so-called bad bank plan should brighten prospects for riskier assets such as currencies of emerging markets,” said Masashi Hashimoto, a Tokyo-based foreign- exchange analyst at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan’s largest lender.

Currencies such as the euro are outperforming those of nations whose policy makers are adopting so-called quantitative easing by purchasing debt securities to drive down yields and spur consumer lending.
The Fed unexpectedly announced on March 18 it will buy as much as $300 billion of Treasuries and increase purchases of agency mortgage-backed securities to lower consumer borrowing costs.

Dollar Index 

The Dollar Index, which the ICE uses to track the greenback against the currencies of six major U.S. trading partners, fell 0.7 percent to 83.30. It dropped 4.1 percent last week, the biggest decrease since September 1985, when the U.S., U.K., France, Japan and West Germany agreed at New York’s Plaza Hotel to coordinate the devaluation of the dollar against the yen and deutsche mark.

The Norwegian krone, Australian dollar and New Zealand dollar dollar posted the biggest gains among the 16 most-active currencies against the yen today as the Nikkei 225 Stock Average strengthened 3.4 percent, the MSCI World Index climbed 1.3 percent and Standard & Poor’s 500 Index futures rose 2.9 percent.
“Japan’s stock market is strengthening, which reflects optimism over the U.S. toxic-asset plan,” said Ryohei Muramatsu, manager of Group Treasury Asia in Tokyo at Commerzbank AG. “The yen is likely to be sold.” 

Weakening Yen 

The yen also weakened against the euro after a government survey showed confidence among Japan’s manufacturers fell the most on record this quarter, diminishing the currency’s allure as a shelter from the financial crisis.

“Japan’s fundamentals including its economy are still deteriorating, casting doubt over the appeal of its currency,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo.
The Cabinet Office and Finance Ministry said today sentiment among large manufacturers was minus 66 points in the first quarter compared with minus 44.5 points three months earlier. A negative number means pessimists outnumber optimists. The government began compiling the report in 2004.

Demand for the euro also increased after European Central Bank President Jean-Claude Trichet said in an interview with the Wall Street Journal that zero interest rates have “drawbacks” and would not be “appropriate.”

ECB on Rates 

“The ECB is most reluctant to lowering interest rates,” said Yuji Saito, Tokyo-based head of the foreign-exchange group at Societe Generale SA, France’s third-largest bank.

JPMorgan Chase & Co., Morgan Stanley and Citigroup Inc. are advising investors to buy euros.
Traders are snapping up currencies of nations where central bankers are resisting calls to purchase debt securities as a way of lowering interest rates and bolstering financial systems. Such currencies are becoming scarce after the Fed joined the Bank of England, Bank of Japan and Swiss National Bank in quantitative easing.

“The dollar is a sell near term versus those currencies where quantitative easing is off the table,” said John Normand, head of currency strategy at JPMorgan in London. “The top on euro-dollar will come when the ECB looks likely to join the quantitative-easing crowd. For now, it’s content to stay on the sidelines.”

To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net
Last Updated: March 23, 2009 07:30 EDT