Dollar Falls for Third Day Versus Yen as Rescue Plan Voted Down

By Stanley White and Daniel Kruger

Sept. 30 (Bloomberg) -- The dollar fell for a third day against the yen after a majority in the U.S. House of Representatives voted against a $700 billion rescue of the financial industry.

The yen gained against the Australian and New Zealand dollars as investors pared so-called carry trades on speculation the U.S. stock market sell off will spread to Asia. The pound extended declines against the dollar after its biggest intraday drop in 16 years yesterday and the euro fell for a second day as European governments bailed out banks.

``There could be panic selling of the dollar against the yen,'' said Mitsuru Sahara, senior currency sales manager at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan's biggest publicly traded lender. ``There are still a lot of unstable U.S. banks, so time is of the essence for this bill. Traders are sure to bail out of higher-yielding currencies and put their money back into the yen.''

The dollar fell to 103.77 yen as of 8:29 a.m. in Tokyo from 104.18 late yesterday in New York. The euro was at 149.24 yen from 150.38 yen. The euro fell to $1.4376 from $1.4434. The pound declined to $1.8012 from $1.8086. The dollar may weaken to 103 yen today, Sahara forecast.

The Australian dollar tumbled 4.4 percent to 82.73 yen from late yesterday in Asia, while the New Zealand dollar slid 3.4 percent to 69.36 yen. In carry trades, investors get funds in countries with low borrowing costs and buy assets where returns are higher. Japan's 0.5 percent target lending rate compares with 7 percent in Australia and 7.5 percent in New Zealand. The risk is currency moves erase profits.

Stock Futures

Nikkei 225 Stock Average futures expiring in December closed at 11,215 in Chicago, down 4.8 percent from the Osaka close and 5 percent below the Singapore close, after the Standard & Poor's 500 Index tumbled the most since 1987.

The House voted 228 to 205 against the measure to authorize the biggest government intervention in the markets since the Great Depression. The legislation would have given Treasury Secretary Henry Paulson broad authority to buy troubled assets from financial companies. Federal Reserve Chairman Ben S. Bernanke warned of ``grave threats'' to the financial system if Congress rejected the plan.

``This is the worst of all outcomes,'' said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. ``It sows the seeds of more uncertainty. We may hit new lows in the dollar-yen.''

Fortis

The euro extended declines against the dollar and the yen after Belgium, the Netherlands and Luxembourg gave an 11.2 billion euro ($16.1 billion) lifeline yesterday to Fortis, the largest Belgian financial-services company. The pound fell after the U.K. Treasury seized Bradford & Bingley Plc yesterday, the nation's biggest lender to landlords.

``There's still a lot of lingering issues out there,'' said David Watt, a senior currency strategist in Toronto at RBC Capital Markets, Canada's biggest bank by assets. ``Do you really want to go into the euro right now? Do you really want to go into the British pound given the events that happened there over the weekend?''

Futures on the Chicago Board of Trade indicated yesterday a 66 percent chance that the Fed would reduce its 2 percent target lending rate by a half-percentage point by its Oct. 29 meeting, compared with zero odds a week ago. There was a 34 percent chance policy makers would cut by a quarter-point.

Currency Swaps

The Fed increased its existing currency swaps with foreign central banks to $620 billion from $290 billion to make more dollars available worldwide. The European Central Bank, the Bank of England and the Bank of Japan are among the participating authorities.

Citigroup Inc., the biggest U.S. bank by assets, agreed to acquire the banking operations of Wachovia Corp. for more than $2 billion in stock, rescuing the Charlotte, North Carolina- based lender beset by mortgage losses.

Traders raised bets the ECB would lower borrowing costs in the months ahead to revive the 15-nation economy. The implied yield on the Euribor futures contract expiring in March fell 34 basis points to 4.33 percent yesterday. Policy makers will keep the benchmark rate at 4.25 percent when they meet Oct. 2, according to all 58 economists surveyed by Bloomberg News.

Implied volatility on one-month euro-dollar options rose yesterday to 15.88 percent, the highest in almost eight years. On Sept. 18, it reached 15.55 percent, the same level that triggered the Group of Seven nations to buy euros in 2000 to halt the 27 percent slide from its 1999 debut.

To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net.