Dollar Falls Versus Yen as AIG Rescue Fails to Quell Concern

By Ye Xie and Bo Nielsen

Sept. 17 (Bloomberg) -- The dollar declined against the yen as the Federal Reserve's $85 billion bailout of insurer American International Group Inc. failed to quell concern credit market losses will deepen.

Japan's currency increased versus the Brazilian real while the Swiss franc gained against the Australian dollar on speculation investors will reduce holdings of higher-yielding assets and pay back loans in Japan and Switzerland. The pound fell versus the euro on concern British home-loan provider HBOS Plc may not have access to funding.

``Currencies reacting well to the volatile environment, namely the yen and Swiss franc, will continue to be favored,'' said Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York. ``Despite the government's takeover of AIG, concerns about financial institutions and credit markets are still with us.''

The yen climbed 1 percent to 104.62 per dollar at 11:53 a.m. in New York, from 105.65 yesterday, when it touched 103.54, the strongest level since May 27. It rose 1 percent to 147.89 per euro, from 149.33 yesterday, when it touched 147.04, the strongest since August 2006. The dollar traded at $1.4136 per euro, compared with $1.4129.

Japan's currency increased 4.6 percent to 55.74 versus the real while the franc rose 2.4 percent to 1.1401 Australian dollars as stocks fell, encouraging investors to reduce trades in which they get funds in a country with low borrowing costs and buy assets where returns are higher. Benchmark interest rates of 13.75 percent in Brazil and 7 percent in Australia compare with 0.5 percent in Japan and 2.75 percent in Switzerland.

Lehman Bankruptcy

The yen jumped the most in a decade against the dollar on Sept. 15 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 Standard & Poor's 500 Index lost 1.5 percent today, and the rate on the three-month U.S. Treasury bill dropped as much as 0.48 percentage point to 0.21 percent, the lowest since at least 1954. The oldest U.S. money-market fund, Reserve Primary Fund, became the first in 14 years to expose investors to losses after writing off $785 million of debt issued by Lehman.

``It's hard to think a bottom is coming around this time,'' said Adam Fazio, a currency strategist at CIBC World Markets Inc. in New York.

The yen will rally in 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.

Weaker Pound

The pound weakened 0.2 percent to 79.43 pence per euro as HBOS, Britain's biggest mortgage bank, fell as much as 52 percent in London trading. Lloyds TSB Group Plc, the U.K.'s biggest provider of checking accounts, is in talks to buy the lender. Sterling stayed lower after a government report showed unemployment claims rose in August by the most since 1992.

The Fed 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 yesterday, rebuffing calls by some investors for an interest-rate cut.

``The Fed is monetizing debt on an unprecedented scale, and I can't see how that can be dollar-positive,'' said Michael Klawitter, a currency strategist at Dresdner Kleinwort in Frankfurt. ``Nothing is solved.''

Dollar's Gains

The dollar has gained 12 percent since touching an all-time low of $1.6038 per euro on July 15, gaining as reports showed the European economy shrank in the second quarter and crude oil dropped more than a third from its peak of $147.27 a barrel.

``We're in this battle between the return to macroeconomic- driven currency markets and the focus on risk reduction and position squaring,'' said Robert Sinche, head of global currency strategy at Bank of America Corp. in New York. ``There are hints that weaker economic news in the U.S. is starting to negatively impact the dollar. 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 in Washington. Building permits, a sign of future construction, dropped 8.9 percent to an 854,000 pace.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net