Dollar May Fall Third Day Versus Yen as Rescue Plan Voted Down

By Daniel Kruger and Ye Xie

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

The yen and the Swiss franc gained yesterday against all the other major currencies as stocks plunged, encouraging investors to sell higher-yielding assets and pay back low-cost loans in Japan. The pound had its biggest intraday drop against the dollar in 16 years and the euro fell as European governments bailed out banks.

``It's unbelievable,'' said John Taylor, chairman of New York-based FX Concepts Inc., the world's biggest currency hedge fund company. ``Nobody wants to be stuck with the fact they're voting on something the average voter hates. It's going to be a catastrophe.''

The dollar traded at 104.05 yen at 6:09 a.m. in Tokyo, after falling 1.7 percent yesterday. The euro was at 150.08 yen, following a 2.9 percent decline. The U.S. currency traded at $1.4421 per euro, after paring yesterday's increase to 1.2 percent.

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.

`More Uncertainty'

``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.''

The euro dropped against the dollar and the yen yesterday after Belgium, the Netherlands and Luxembourg extended an 11.2 billion euro ($16.2 billion) lifeline to Fortis, the largest Belgian financial-services firm. The pound dropped as much as 2.6 percent to $1.7959 and 3.8 percent to 188.11 yen as the U.K. Treasury seized Bradford & Bingley Plc, the nation's biggest lender to landlords. It was sterling's biggest intraday drop versus the dollar since September 1992.

``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?''

Surging Yen

The yen rose 7.9 percent to 52.95 versus the Brazilian real while the franc increased 4 percent to 7.70 South African rand on speculation an 8.8 percent drop in the Standard & Poor's 500 Index yesterday will reduce trades in which investors get funds in countries with low borrowing costs and buy assets where returns are higher. Japan's target rate of 0.5 percent and Switzerland's 2.75 percent benchmark compare with 13.75 percent in Brazil and 12 percent in South Africa.

Futures on the Chicago Board of Trade indicated yesterday a 70 percent chance that the Fed would reduce the 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 30 percent chance policy makers would cut by a quarter-point.

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.

Wachovia Deal

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.

An index of European executive and consumer sentiment dropped to 87.7 this month from 88.5 in August, the European Commission said yesterday in Brussels. That's the lowest since the index fell to 86.6 in November 2001. Economists had forecast the indicator would drop to 87.3 this month, according to the median estimate of 33 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: Daniel Kruger in New York at dkruger1@bloomberg.net; Ye Xie in New York at yxie6@bloomberg.net