Yen Declines Against Euro as Bank Rescues Support Carry Trades

By Stanley White and Ron Harui

Oct. 14 (Bloomberg) -- The yen fell against higher-yielding currencies after governments in the U.S., Europe and Australia pledged to support banks, encouraging investors to increase holdings of euros, British pounds and Australian dollars.

The yen headed for a record 7.1 percent decline against the Australian dollar after Prime Minister Kevin Rudd allotted A$10.4 billion ($7.3 billion) in spending for home buyers, families and pensioners. The U.S. Treasury will buy stakes in banks including Citigroup Inc. and JPMorgan Chase & Co., people briefed on the plan said. European countries committed $1.8 trillion to guarantee bank loans and invest in lenders.

``Policy makers are gradually restoring confidence in banks and credit markets,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``This promotes risk-taking activity that is likely to weaken the yen.''

The yen fell to 140.17 per euro at 2:57 p.m. in Tokyo from 138.57 late yesterday in New York, on course for its first back- to-back decline since Sept. 25. Against the dollar, the yen was quoted at 102.43 from 102.01. The euro rose to $1.3685 from $1.3581. The pound advanced to $1.7527 from $1.7341.

Against the Australian dollar, the yen plunged to 72.66 from 67.57 late yesterday in Asia. Japan's currency fell 4.3 percent versus the New Zealand dollar to 63.69. South Korea's won climbed 3 percent to 11.7975 versus the yen.

Stock Rally

Japan's currency has gained 16 percent versus the Australian dollar and 12 percent against the New Zealand dollar this month as credit-market losses prompted investors to sell higher-yielding currencies. Japan's benchmark rate is 0.5 percent, compared with 6 percent in Australia and 7.5 percent in New Zealand.

Volatility implied by one-month dollar options against Japan's currency declined yesterday by the most in almost 13 years, reducing the risk of carry trades, where investors borrow currencies with low interest rates and invest in nations with higher central bank yields.

``Volatility has been falling broadly as we move out of a panic mode,'' wrote analysts led by Hans-Guenter Redeker, London-based global head of foreign-exchange strategy at BNP Paribas SA, in a research note yesterday. ``We expect risk appetite to stay strong, putting yen crosses under pressure.''

Implied volatility on one-month dollar-yen options dropped to 20.98 percent today from 23.67 percent yesterday, when it tumbled by 5.97 percentage points, the most since Bloomberg began compiling the data in December 1995.

`Panic Situation'

Shares rallied, with the MSCI Asia-Pacific Index of regional shares rising 9.3 percent, heading for the biggest gain in a decade. The Standard & Poor's 500 Index yesterday rose by the most in seven decades.

``The governments have gotten rid of the panic situation, which is very good,'' said Toru Umemoto, chief currency analyst at Barclays Capital in Tokyo. The yen may decline to 103 against the dollar in the coming week, he said.

The Bush administration will spend about half of a total of $250 billion for stakes in banks, people briefed on the matter said. The banks are Citigroup, Wells Fargo & Co., JPMorgan, Bank of America Corp., Goldman Sachs Group Inc., Morgan Stanley, State Street Corp., and Bank of New York Mellon Corp., they said. Treasury Secretary Henry Paulson is scheduled to hold a press conference at 8:30 a.m. in Washington.

Money Markets

Losses in the dollar accelerated against the euro after the Fed said yesterday the European Central Bank, the Bank of England and the Swiss National Bank will offer financial institutions unlimited funds in the U.S. currency.

The London interbank offered rate, or Libor, for three- month dollar loans dropped 7 basis points to 4.75 percent yesterday, the British Bankers' Association said. Japan and Australia pumped $9.1 billion into money markets after European leaders agreed to guarantee new debt from financial institutions and use taxpayers' money to rescue banks.

Currency strategists and investors say Europe's actions may not prevent the region's economy from slowing. Morgan Stanley predicts a decline in the euro to $1.25 by 2009, from $1.3581 yesterday and $1.60 in July, and strategists at BNP Paribas see weakness after ``some support in the near term.''

``The euro was overbought, over-owned, over-rated and overvalued,'' said Stephen Jen, the global head of currency research at Morgan Stanley in London. Jen correctly predicted in July that the euro would slump just as it began to weaken 15 percent. ``The strategic view has to be that a global recession will keep seeing the euro sold off.''

Japan may halt sales of government-held shares to help protect financial markets from the global credit crisis, Finance Minister Shoichi Nakagawa said in a statement today. Japan will also take steps to tighten restrictions on short-selling, while relaxing regulations on share buybacks to limit the spread of the global financial crisis.

``Measures from Japan could lead to a further rebound in stocks and help stabilize financial markets,'' said Kengo Suzuki, currency strategist at Shinko Securities Co. in Tokyo. ``This could actually weaken the yen on an increase in risk appetite.''

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