Dollar Gains on U.S. Government Plan to Revive Credit Markets

By Bo Nielsen

Sept. 19 (Bloomberg) -- The dollar rose the most in more than five months against the yen after U.S. officials said they are working on a plan to stop financial institutions from failing.

The currency also gained for the first time in three days versus the euro as Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke proposed moving troubled assets from the balance sheets of American financial companies into a new institution. The yen tumbled for a second day against the Australian and New Zealand dollars as investors bought high- yielding assets funded in the Japanese currency.

``This will put an end to the banking crisis,'' said David Woo, London-based head of foreign-exchange strategy at Barclays Capital, the third-biggest currency trader. ``But people underestimate how long it will take to get this thing through Congress.''

The dollar rose 2.3 percent versus the Japanese currency, the largest gain since April 1, to 107 as of 7:38 a.m. in New York, paring this week's drop to 0.3 percent. The U.S. currency climbed 1.1 percent to $1.4196 per euro. The euro advanced 1.1 percent to 152.91 yen from 151.28 yen, following a 0.9 percent gain yesterday.

U.S. regulators met with lawmakers late yesterday to discuss a plan to clean up the devalued mortgage-linked assets at the root of the worst credit crisis since the Great Depression. Congressional leaders said they intend to pass legislation within days.

The U.S. currency extended its gains after the Treasury today announced plans to use as much as $50 billion from the country's Exchange Stabilization Fund to insure money-market mutual fund holdings against a collapse in financial markets.

Stocks, Bonds

Stocks rose and bonds fell. Europe's Dow Jones Stoxx 600 Index surged 7 percent, the most since it was inaugurated in 1987. Futures on the Standard & Poor's 500 Index climbed 3.8 percent, and the MSCI Asia Pacific Index rebounded 4.9 percent from a three-year low. The yield on the two-year U.S. Treasury note rose 33 basis points to 2.05 percent.

Investors are gaining confidence after the Fed agreed with global central banks yesterday to almost quadruple the amount of dollars they can provide to money markets to $247 billion. The cost of borrowing in dollars overnight surged the most in its history on Sept. 16 after Lehman Brothers Holdings Inc. filed the biggest bankruptcy in history and the U.S. government took control of American International Group Inc. It fell for a second day today to 3.25 percent. That's still 125 basis points above the Fed's target rate.

Forecasts Changed

``I fear this issue is not going to be resolved within the timetable that the market is looking for,'' London-based David Simmonds, head of currency research at Royal Bank of Scotland Group Plc, wrote in a note to clients today. It's only ``conceivable'' a plan could be enacted before the inauguration of the new U.S. president in January, he added.

Banks have raised their forecasts for the dollar. The median estimate in a Bloomberg News survey of 41 analysts is for the U.S. currency to end the year at $1.44 against the euro. It was $1.50 per euro a month ago.

The dollar still headed for a weekly decline versus the Japanese currency.

``I wouldn't have too much confidence in U.S. assets yet, because we don't know how the situation is going to play out,'' said Naomi Fink, a Tokyo-based strategist at Bank of Tokyo- Mitsubishi UFJ Ltd., in a Bloomberg television interview.

As of June 30, Citigroup Inc., JPMorgan Chase Co., Bank of America Corp., Goldman Sachs Group Inc., Merrill Lynch & Co. and Lehman had more than $500 billion of so-called Level 3 assets, or ones whose values they say can only be determined through internal models because of illiquid markets, according to New York-based bond research firm CreditSights Inc.

Carry Trades

The yen dropped against higher-yielding currencies today as appetite for carry trades rebounded. It fell 2.7 percent to 87.14 versus Australia's dollar, the most since March 11, and 2.1 percent to 72.78 against New Zealand's dollar.

The South Korean won and the Indian rupee were the biggest gainers among Asian currencies today as the U.S. government proposals helped revive demand for the region's stocks. The won rose 1.3 percent to 1,139.40 per dollar and the rupee increased 1.4 percent to 45.830.

The yen may strengthen to 100 per dollar this year as traders cut holdings of higher-yielding overseas assets funded with Japan's currency, known as carry trades, Eisuke Sakakibara, a former currency-policy official in Japan, said in a Bloomberg television interview. There is ``no quick fix'' for the credit- market turmoil, he said.

`Mr. Yen'

Sakakibara, 67, currently a professor at Tokyo's Waseda University, was dubbed ``Mr. Yen'' because of his ability to influence the foreign-exchange market during his 1997-1999 tenure at the Finance Ministry.

The benchmark interest rate is 0.5 percent in Japan, compared with 7 percent in Australia and 7.5 percent in New Zealand. The risk in carry trades is that currency-market moves erase profits.

``The last 12 to 18 hours have been an unambiguous good for the financial world and the global economy,'' said Peter Pontikis, a treasury strategist at Suncorp-Metway Ltd. in Brisbane, Australia. ``The first response is the yen isn't an attractive asset now.''

To contact the reporters on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net;