Yen Heads for Biggest Weekly Gain Since May on Bailout Clash

By Ye Xie and Bo Nielsen

Sept. 26 (Bloomberg) -- The yen rose against the dollar and headed for its biggest weekly gain since May as U.S. lawmakers disagreed over a financial rescue and Washington Mutual Inc. became the nation's biggest bank to collapse.

Japan's currency also strengthened against the euro and the Brazilian real after a group of Republicans opposed to the Treasury's $700 billion asset-purchase plan submitted an alternative proposal, prompting investors to reduce holdings of higher-yielding assets funded in Japan.

``It's a nightmare,'' said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. ``Safe-haven trades are back on. There's an enormous amount of uncertainty. No one is committed to big positions.''

The yen rose 0.7 percent to 105.82 per dollar at 10:13 a.m. in New York, from 106.56 yesterday, extending this week's gain to 1.5 percent. The yen increased 0.5 percent to 154.94 per euro, from 155.68, and was up 0.4 percent for the week. The dollar traded at $1.4635 per euro, compared with $1.4609, having depreciated 1.2 percent this week.

U.S. lawmakers were preparing to meet again today in Washington after some House Republicans said they wouldn't back Treasury Secretary Henry Paulson's bailout plan. Their rival proposal calls for a mortgage-backed security insurance fund financed by premiums from the holders of those securities.

``The delay of the package isn't doing the markets any favors,'' said David Powell, a currency strategist at Bank of America Corp. in London. ``But we still see the package being passed next week. Nobody wants to be seen as the person who caused the breakdown on these negotiations.''

Stronger Yen

The yen gained 2.3 percent to 57.16 versus the real today and 1.1 percent to 88.03 against the Australian dollar as a drop in U.S. stocks encouraged investors to exit trades in which they get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's 0.5 percent target lending rate compares with 4.25 percent in Europe, 7 percent in Australia and 13.75 percent in Brazil.

The U.S. government seized Seattle-based Washington Mutual, which faced $19 billion of mortgage-related losses, after customers withdrew $16.7 billion since Sept. 15. JPMorgan Chase & Co. agreed to acquire WaMu's deposits and branches for $1.9 billion.

The Federal Reserve, the European Central Bank and their counterparts in the U.K. and Switzerland said today they will provide dollars to money markets for next week to ensure ample liquidity at the end of the quarter.

Cash Hoarding

The three-month London interbank offered rate, or Libor, that banks charge each other for dollar loans, was little changed today at 3.76 percent, near the highest level since January, on concern Paulson's bailout plan will be diluted, encouraging banks to hoard cash.

``News about Washington Mutual will make the market nervous, and people will doubt whether a U.S. rescue plan will work,'' said Motonari Ogawa, director of currency trading in Tokyo at Barclays Capital Inc., a unit of the U.K.'s third- biggest bank.

U.S. Treasury notes extended their longest stretch of weekly gains since February. The yield on the two-year note fell 14 basis points, or 0.14 percentage point, to 2.02 percent today. It has dropped almost 40 basis points in the past five weeks. The Standard & Poor's 500 Index sank 1.1 percent.

The yen may rise further as the VIX volatility index, a Chicago Board Options Exchange gauge reflecting expectations of stock market price changes, closed above 30 for the past nine days, indicating markets are facing a shock comparable to the 1997 Asian currency crisis and the Sept. 11, 2001, terrorist attacks, according to JPMorgan Chase.

`Act Quickly'

``The U.S. needs to act quickly, because the financial system and the dollar are at risk,'' said Akio Shimizu, chief manager of currency trading in Tokyo at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan's largest publicly listed lender.

The yen has increased 2.8 percent versus the dollar in September, the first monthly gain since March. Against the euro, Japan's currency has advanced 3 percent. The dollar is up 0.3 percent versus the euro this month.

Futures contracts on the Chicago Board of Trade showed traders were certain the Fed would reduce the 2 percent target rate for overnight lending between banks by Oct. 29. There's a 76 percent chance policy makers will cut by a quarter-percentage point and 24 percent odds of a half-point decrease. Traders priced in a 68 percent likelihood of no change a week ago.

The U.S. economy expanded at an annual rate of 2.8 percent in the second quarter, slower than the previous estimate, the Commerce Department said today. The Reuters/University of Michigan final index of consumer sentiment declined to 70.3, lower than forecast, after a reading of 73.1 in early September. The measure was still higher than the August reading of 63.

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