Yen Declines Against Euro on Fed Offer of Cash, Buffett Deal

By Bo Nielsen and Stanley White

Sept. 24 (Bloomberg) -- The yen weakened against the euro after the Federal Reserve agreed to provide central banks with more cash to increase lending, encouraging traders to purchase higher-yielding assets funded in Japan.

Japan's currency also slid, dropping against most of its major counterparts, as Goldman Sachs Group Inc. raised $5 billion from Warren Buffett's Berkshire Hathaway Inc. and the same amount in a stock offering. Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson are due to give more congressional testimony on a proposed $700 billion bailout.

``There's certainly a volley back and forth between taking on risk and taking it off,'' said Jeff Gladstein, global head of foreign-exchange trading at AIG Financial Products in Wilton, Connecticut. ``Everyone is still trying to decipher the bailout package.''

The yen dropped 0.6 percent to 155.59 per euro at 10:06 a.m. in New York, from 154.63 yesterday. The yen traded at 105.84 per dollar, compared with 105.56. The euro appreciated 0.5 percent to $1.4724, from $1.4648.

Berkshire Hathaway, led by 78-year-old Buffett, is buying $5 billion of Goldman perpetual preferred stock with a 10 percent dividend. Berkshire also gets warrants to buy $5 billion of common stock at $115 a share at any time in the next five years. Goldman also sold 40.65 million shares of common stock at $123 apiece, the firm said in a statement.

Carry Trades

Demand for the yen typically drops when appetite for higher-risk assets increases, as traders pare so-called carry trades. In such transactions, investors get funds in a country with low borrowing costs and invest in another with higher interest rates, earning the spread between the two. The risk is that currency-market moves can erase those profits.

The Bank of Japan's benchmark rate of 0.5 percent compares with 4.25 percent in Europe, 7 percent in Australia and 7.5 percent in New Zealand.

The yen fell 0.7 percent to 88.53 per Australian dollar and 0.6 percent to 72.35 versus the New Zealand dollar.

``Risk appetite is slightly better, but still very fragile,'' said Ian Stannard, a senior currency strategist in London at BNP Paribas SA, the most accurate currency forecaster in a 2007 Bloomberg survey.

The dollar fell against the euro earlier as the Fed arranged $30 billion in swaps lines with central banks in Norway, Sweden, Denmark and Australia, providing easier access to the U.S. currency in a response to demand for dollar loans.

Bailout Debate

The U.S. Congress may prolong debate on the government's proposal to remove illiquid assets from the banking system. Lawmakers have balked at rubber-stamping the Treasury's plan, with Democrats demanding it include support for homeowners and limits on executive pay. Republicans are also resisting the plan, which economists predict would push the budget deficit to an all-time high next year.

Bernanke and Paulson said yesterday the bailout is needed to avert a recession in the world's biggest economy.

``The risk this afternoon is that Bernanke sounds more concerned from the fallout from the banking crisis into the real economy,'' said Steve Barrow, a currency strategist at Standard Bank Plc in London. ``That could weigh on the dollar.''

The U.S. currency has lost about 4.5 percent versus the euro since touching a one-year high of $1.3882 on Sept. 11. The dollar reached $1.6038 on July 15, the weakest level since the European currency made its 1999 debut. It may weaken to as low as $1.50 this year, Stannard said.

The chance of the Fed cutting its 2 percent benchmark rate by a quarter-percentage point at its Oct. 29 policy meeting was 74 percent, compared with 58 percent yesterday, futures contracts on the Chicago Board of Trade showed.

The dollar fell against the euro today as the National Association of Realtors reported that U.S. sales of existing homes declined last month to a 4.91 million annual rate. The median forecast of 73 economists surveyed by Bloomberg News was for a drop to a 4.94 million pace.

To contact the reporters on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net