Yen Extends Decline as Treasury Said to Invest in U.S. Banks

By Stanley White and Ye Xie

Oct. 14 (Bloomberg) -- The yen fell for a second day on speculation the U.S. Treasury will stabilize the financial system by investing $125 billion in U.S. banks, spurring investors to buy high-yielding assets funded in Japan's currency.

The yen also weakened against the Australian and New Zealand dollars, two favorites of so-called carry trades, after U.S. stocks yesterday gained the most in seven decades. European countries committed $1.8 trillion to guarantee bank loans and the Federal Reserve led efforts to flood money markets with dollars yesterday to prevent a financial system collapse.

``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 139.51 per euro at 8:36 a.m. in Tokyo from 138.57 late yesterday in New York. Japan's currency touched 132.24 on Oct. 10, the strongest since June 2005. Against the dollar, it was at 102.36 from 102.01. It advanced to 97.92 on Oct. 10, the strongest since March 19. The euro bought $1.3626 from $1.3581. The yen may fall to 139.60 per euro and 102.60 versus the dollar today, Ishikawa forecast.

Against the Australian dollar, the yen declined to 72.11 from 67.57 late yesterday in Asia. Japan's currency fell 3.9 percent versus the New Zealand dollar to 63.32.

Stock Rally

The Standard & Poor's 500 Index rose 11.6 percent yesterday, encouraging investors to sell the Japanese currency to buy high- yielding assets in carry trades. Japan's 0.5 percent benchmark interest rate is the lowest among developed nations.

Japan's currency has gained 17 percent versus the Australian dollar and 12 percent against the New Zealand dollar this month as credit-market losses prompted investors to reduce carry trades.

``The yen is probably getting near an end of its strong run that we've seen recently,'' said Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York, in an interview on Bloomberg Television. ``It's a case where everyone goes all out to do whatever they can. As we get to some successful resolution, we'll see some weakness in the yen.''

The Bush administration will announce a plan to rescue frozen credit markets that includes spending about half of a total of $250 billion for stakes in nine major banks, according to people briefed on the matter.

The banks are Citigroup Inc., Wells Fargo & Co., JPMorgan Chase & Co., Bank of America Corp., Goldman Sachs Group Inc., Morgan Stanley, State Street Corp., and Bank of New York Mellon Corp., said the people. One of the people also said Merrill Lynch & Co. will receive an investment.

U.S. Plan

The move by policy makers ``is not going to avoid a sharp global recession, but it's averting something a lot worse,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``Risky assets are performing well today. I won't fight it.''

Losses in the dollar accelerated 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, providing easier access to dollars in response to demand for loans.

``This decision is a further step toward alleviating dollar funding pressures outside the U.S., which may have played a key role in creating substantial U.S. dollar upside pressure in foreign-exchange markets,'' Thomas Stolper, an economist at Goldman Sachs Group Inc. in London, wrote in a research note yesterday.

`Significant Downturn'

Non-U.S. banks have about $12 trillion in dollar- denominated liabilities, Stolper wrote, citing data from the Bank for International Settlements.

``The net impact of this banking crisis is likely to be a significant downturn in global growth, but it is not entirely clear who will emerge from this as a longer-term winner,'' said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. ``The dollar is overbought in the short-term. Europe certainly has its own challenges.''

To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.netYe Xie in New York at yxie6@bloomberg.net