By Stanley White
Sept. 18 (Bloomberg) -- The dollar fell for a second day against the yen and the euro on speculation more financial institutions will fail as bank lending seizes up.
The currency also fell against the Swiss franc after a record slump in shares of Goldman Sachs Group Inc. and Morgan Stanley, the only remaining independent brokerages on Wall Street. The cost of borrowing in dollars for three months jumped the most since 1999 as a U.S. government bailout of American International Group Inc. failed to ease concern credit losses will spread.
``You can't choose the dollar when the world's financial problems radiate from the U.S.,'' said Hideki Amikura, deputy general manager of foreign exchange at Nomura Trust and Banking Co., a unit of Japan's largest brokerage. ``Credit markets show no signs of settling down and traders are focused on whether other banks will fail. This environment supports yen gains.''
The dollar slid to 104.44 yen as of 12:36 p.m. in Tokyo from 104.66 late yesterday in Tokyo. It touched 103.54 on Sept. 16, the weakest since May 27, and Amikura says the currency may fall to 103.80 yen in the coming days. The U.S. currency fell to $1.4355 per euro from $1.4326. It fell to 1.1014 Swiss francs from 1.1029. The yen was at 149.67 per euro from 149.88.
`Crazy' Markets
The MSCI Asia Pacific Index of regional shares fell 3.4 percent, led by banks. U.S. Treasury three-month bill rates were near the lowest since World War II. Gold futures gained 0.8 percent to $857.13 an ounce, extending their biggest jump in 26 years, as investors sought a haven from the credit crisis.
``The dollar's risks remain to the downside,'' said Motonari Ogawa, director of currency trading in Tokyo at Barclays Capital Inc., a unit of the U.K.'s third-biggest bank. ``Looking at stocks and several other markets you can see things are just crazy. That feeds into speculation about more problems in the financial system.''
The dollar may decline to 103.50 yen today, he said.
The three-month London interbank offered rate, or Libor, for dollars rose 19 basis points to 3.06 percent, the British Bankers' Association said yesterday. The increase was the biggest since Sept. 29, 1999, during the run-up to the new millennium.
Since touching a one-year high of $1.3882 per euro on Sept. 11, the dollar has lost 3 percent. The premium traders pay to protect against the decline of the euro versus the dollar fell for a fourth consecutive day yesterday. The 25-delta risk reversal declined to 0.38 percent after reaching a record high of 1.23 percent on Sept. 11.
Economic Slump
``There are hints that weaker economic news in the U.S. is starting to negatively impact the dollar,'' said Robert Sinche, head of global currency strategy at Bank of America Corp. in New York. ``The capitulation selling of euros against the dollar and the yen may be over.''
U.S. housing starts fell 6.2 percent in August to an annual rate of 895,000, the lowest since January 1991, the Commerce Department said yesterday. Building permits, a sign of future construction, dropped 8.9 percent to an 854,000 pace.
The yen jumped 3 percent against the dollar on Sept. 15, the most in a decade, as Lehman Brothers Holdings Inc. filed for the biggest bankruptcy in history, sparking a global stock market rout and a surge in bank loan costs.
The Federal Reserve will provide AIG with a two-year loan, take 79.9 percent of the New York-based company's stock and replace its management. The central bank kept its target rate for overnight lending between banks at 2 percent on Sept. 16, rebuffing calls by some investors for an interest-rate cut.
Australian Dollar Drops
The Australian dollar declined to 79.04 U.S. cents from 79.34 cents late yesterday in Asia. It also fell to 82.60 yen from 84.00 yen. Macquarie Group Ltd., Australia's largest investment bank, led financial stocks lower on speculation the U.S. credit crisis will make it more difficult for the company to repay debt.
The cost to protect against a failure to pay debt by Morgan Stanley and Goldman rose to a record, credit-default swaps showed. Morgan Stanley is weighing a merger with Wachovia Corp. and several other banks, two people familiar with the matter said.
``Risk appetite has imploded and CDS spreads have reached levels making it impossible for the highly leveraged U.S. broker dealers to survive for long,'' analysts led by Hans-Guenter Redeker, the London-based global head of currency strategy at BNP Paribas SA, France's biggest bank, wrote in a research note yesterday. ``The current environment of nervous sentiment is likely to see dollar-yen upside limited.''
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.
The yen will extend its rally over the next six months, a survey of Bloomberg users showed. Investors are the most bullish on the currency since March, according to 3,470 respondents from New York to Paris and Tokyo in the monthly Bloomberg Professional Global Confidence Index.
To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.netYe Xie in New York at yxie6@bloomberg.net
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