Dollar Declines Against Yen as U.S. Banks May Report Losses

By Stanley White and Kosuke Goto

July 16 (Bloomberg) -- The dollar fell against the yen on speculation U.S. banks will report further losses this week, eroding confidence in the financial system of the world's largest economy.

The U.S. currency traded near a record low versus the euro before quarterly earnings from Wells Fargo & Co., Merrill Lynch & Co., JPMorgan Chase and Citigroup Inc. that may show banks are losing more money after the U.S. subprime mortgage collapse. Federal Reserve Chairman Ben S. Bernanke yesterday abandoned his view that economic risks had diminished as regulators announced plans for a rescue of Freddie Mac and Fannie Mae, the two largest buyers of U.S. mortgages. The yen rose as losses in Asian stocks spurred investors to pare so-called carry trades.

``Dollar selling will continue for some time,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``Bank earnings will likely highlight that the U.S. financial system isn't stable. A protracted downturn in U.S. economic growth is all but unavoidable.''

The dollar fell to 104.41 yen as of 6:55 a.m. in London, from 104.73 yen late yesterday in New York. It traded at $1.5907 per euro, after touching $1.6038 yesterday, the weakest since the 15-nation currency's 1999 debut. Japan's currency rose to 166.10 per euro from 166.65. The dollar may weaken to $1.5920 versus the euro and 104.40 yen today, Soma forecast.

The Australian dollar declined to 97.80 U.S. cents from 97.93 cents late yesterday in New York after Reserve Bank of Australia Governor Glenn Stevens said slowing demand will ease inflationary pressure. The Aussie, as the currency is known, reached a 25-year high of 98.49 cents yesterday.

`Yen Buying'

The yen rose to 102.20 per Australian dollar from 102.56. It also gained 0.4 percent against the New Zealand dollar to 80.62 and 0.2 percent versus the South African rand to 13.6545. The MSCI Asia-Pacific Index of regional shares fell 0.2 percent for its third day of declines.

``Risk aversion is prompting yen-buying,'' said Akira Kato, senior manager of the foreign-exchange trading department in Tokyo at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan's biggest publicly traded lender by assets. ``Investors are concerned about U.S. government-sponsored enterprises and upcoming earning reports from the U.S.''

The yen may rise to 165.50 a euro today, he said.

In carry trades investors borrow in countries with low interest rates and invest in high-yielding assets elsewhere. Japan's 0.5 percent target lending rate compares with 4.25 percent for the European Central Bank, 7.25 percent in Australia, 8.25 percent in New Zealand and 12 percent in South Africa.

$400 Billion

Wells Fargo, the second-biggest U.S. mortgage lender, reports quarterly earnings today. JPMorgan Chase and Merrill announce results tomorrow, while Citigroup, the biggest U.S. bank, publishes its earnings on July 18.

Global banks and securities firms have reported losses of about $400 billion due to rising defaults on mortgages for U.S. homeowners with poor credit, according to Bloomberg data.

In testimony before the Senate Banking Committee yesterday, Bernanke abandoned his June assessment that the threat of an economic downturn has diminished, telling lawmakers that growth and inflation risks are increasing. Treasury Secretary Henry Paulson told the panel that the government would buy shares in Fannie and Freddie ``only if necessary.'' Bernanke speaks again before the House Financial Services Committee at 10 a.m. in Washington today.

`More Bearish'

``Bernanke has become a bit more bearish on the U.S. economy than before,'' said Yuji Kameoka, a senior economist and currency analyst in Tokyo at Daiwa Institute of Research, a unit of Japan's second-largest brokerage. ``This reduces expectations for a Fed rate increases this year and is currently weighing on the dollar.''

The U.S. currency may move between 104 yen and 106 yen, and $1.58 and $1.60 a euro this week, he said.

Federal funds futures on the Chicago Board of Trade show a 7 percent chance the Fed will increase its 2 percent target lending rate at its Aug. 5 meeting, compared with 77 percent odds a month ago.

The Dollar Index, which tracks the greenback against the currencies of six U.S. trading partners, fell for a sixth day, dropping 0.2 percent to 71.71.

The U.S. currency has given up most of the gains made versus the euro since July 3, when European Central Bank President Jean-Claude Trichet said he had ``no bias'' on future interest-rate moves. The dollar strengthened 0.6 percent to $1.5706 per euro that week. It has since slumped 1.2 percent on concern that losses at Fannie Mae and Freddie Mac will deepen.

Consumer Prices

U.S. consumer prices may have risen at an annual rate of 4.5 percent in June, the most since September 2005, according to the median forecast of economists surveyed by Bloomberg News. The Labor Department report is due at 8:30 a.m. New York time.

``Consumer-price data aren't likely to support the dollar,'' Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland Plc in Tokyo and a former Bank of Japan currency trader, wrote in a research note today. ``It will serve as a reminder that the U.S. faces stagflationary risks, making it difficult to conduct monetary policy.''

The dollar may fall to a seven-week low of 103.70 yen, according to technical analysis of its price chart, said Masashi Hashimoto, a senior currency analyst at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo.

The U.S. currency is poised to slide as the relative strength index, a comparison of the magnitude of gains and losses, shows the dollar is losing momentum, Hashimoto said. The dollar's 14-day relative strength index against the yen, was 37.3 today, down from 46.4 on July 14 and 51.6 a week ago.

The so-called support level of about 103.70 yen represents a 38.2 percent reversal of the dollar's climb to a high of 108.58 reached on June 16 from a low of 95.76 on March 17, based on a series of numbers known as the Fibonacci sequence. Support is a level where buying is expected to outweigh selling.

To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.net; Kosuke Goto in Tokyo at kgoto2@bloomberg.net.