Yen Declines After U.S. Government Takes Over Fannie, Freddie

By Stanley White

Sept. 8 (Bloomberg) -- The yen fell against the euro and the dollar on speculation the U.S. government's takeover of Fannie Mae and Freddie Mac will prompt investors to buy higher- yielding assets funded with Japan's currency.

The yen declined the most against the Australian and New Zealand dollars, two favorites of so-called carry trades, on speculation government support for the two largest U.S. mortgage financiers will stem subprime losses that threatened to damage the global economy. The euro and the British pound were among higher-yielding currencies to rise against the dollar.

``The yen is likely to weaken further,'' said Koji Fukaya, senior currency strategist at the Tokyo unit of Deutsche Bank AG, the world's largest currency trader. ``This is a big release of stress on the global financial system that will help improve risk appetite.''

The yen fell to 155.76 per euro at 9:04 a.m. in Tokyo from 153.67 late in New York on Sept. 5. It declined to 108.60 versus the dollar from 107.73. The euro rose to $1.4341 from $1.4267. The yen may decline to 110 per dollar in the next two weeks, Fukaya forecast. The U.K. pound rose to $1.7828 from $1.7661.

Against the Australian dollar, the yen fell to 89.93 from 87.91 late in New York on Sept. 5. It declined to 73.45 per New Zealand dollar from 72.04.

In carry trades, investors get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's 0.5 percent benchmark interest rate compares with 2 percent in the U.S., 4.25 percent in Europe, 7 percent in Australia and 8 percent in New Zealand. The risk to carry trades is that currency moves may erase profits.

Government Control

The U.S. government seized control of Fannie Mae and Freddie Mac yesterday after the biggest surge in mortgage defaults in at least three decades threatened to topple the companies making up almost half the U.S. home-loan market.

The Treasury can buy as much as $100 billion of a special class of stock in each company as needed to maintain their positive net worth. It will also provide secured short-term funding to Fannie, Freddie and 12 federal home-loan banks, and purchase mortgage-backed debt in the open market.

Standard & Poor's said yesterday the rescue of Fannie and Freddie won't change its AAA rating for U.S. debt, its highest credit rating.

``The yen is likely to take a hit,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``A government bailout will certainly stabilize Freddie and Fannie and improve risk appetite for carry trades.''

The yen may decline to 109.20 versus the dollar today, he said.

Futures traders increased their bets that the euro will decline against the U.S. dollar, figures from the Washington- based Commodity Futures Trading Commission show.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain -- so-called net shorts -- was 38,623 on Sep. 2, compared with net shorts of 33,778 a week earlier.

To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.net