Yen Falls Against Higher-Yielding Currencies on Bank Rescues

By Stanley White and Agnes Lovasz

Oct. 20 (Bloomberg) -- The yen fell as state-backed bank rescue plans in the U.S., Europe and South Korea helped reduce cost of borrowing between banks, encouraging purchases of higher-yielding currencies funded in Japan.

The yen declined against the Australian dollar and the South African rand as U.S. dollar borrowing costs in Singapore dropped the most in nine months. South Korea's won strengthened versus the greenback after the government guaranteed $100 billion of lenders' foreign-currency debts to boost confidence in the nation's financial system.

``Traders will take a break from buying the yen,'' said Hideki Amikura, deputy general manager of foreign exchange at Nomura Trust and Banking Co. Ltd., a unit of Japan's largest brokerage. ``Short-term rates are falling, showing that calm is returning to financial markets. South Korea's measures are also helping sentiment.''

The yen declined to 137.93 per euro at 8:22 a.m. in London from 136.21 late in New York on Oct. 17. Japan's currency also dropped to 102.14 per dollar from 101.69. Against the euro, the dollar weakened to $1.3502 from $1.3410. The British pound rose to $1.7470 from $1.7281. The yen may fall to 138 versus the euro today, Amikura said.

The South Korean won rose 1.4 percent to 1,315.20 per dollar. The Bank of Korea said yesterday it will provide $30 billion in U.S. dollars to banks to increase their access to funding. The currency tumbled last week by the most since an International Monetary Fund bailout in 1997 after Standard & Poor's said lenders may struggle to refinance overseas debt.

Carry Trades

The ruble surged against the dollar by the most in more than nine years and also gained versus the euro, after the central bank put a limit on currency-swap positions. The managed currency climbed to 25.8838 per dollar from 26.3566 at the end of last week, the biggest gain since May 17, 1999. It gained 1.2 percent to 30.0291 against the central bank's dollar-euro basket maintained by the Bank Rossii, the central bank.

Against the Australian dollar, the yen fell 2.3 percent to 71.65. Japan's currency also declined 1.6 percent versus the South African rand to 10.3186.

The yen typically falls when demand for higher-yielding currencies increases as traders put on so-called carry trades. In such transactions, investors borrow in currencies with low interest rates and transfer the funds to nations with higher rates. Japan's target rate of 0.5 percent is the lowest among major economies.

The U.S. this month approved a $700 billion bank rescue plan, while European governments committed $1.8 trillion on Oct. 13 to guarantee loans and invest in lenders. European Central Bank President Jean-Claude Trichet yesterday urged banks to start lending again after policy makers put them on ``the path'' of recovery by pumping record amounts of cash into money markets.

`Sharp Improvement'

The three-month Singapore interbank offered rate, or Sibor, for U.S. dollars fell 27 basis points to 4.20 percent today, the biggest drop since Jan. 23. Hong Kong's local-currency rate for similar-maturity interbank loans dropped 53 basis points to 3.66 percent, sliding the most in almost nine years. A basis point is 0.01 percentage point.

The yen will weaken ``over the coming days as we continue to see a sharp improvement in interbank credit markets,'' strategists led by Hans-Guenter Redeker, the London-based global head of currency strategy at BNP Paribas SA, France's biggest bank, wrote in a research note yesterday. ``The underlying credit picture has continued to improve.''

Japan's currency also fell as volatility implied by one- month dollar-yen options declined to 19.42 percent from 20.32 percent at the end of last week, indicating a smaller risk of exchange-rate fluctuations that may erode profits on carry trades. It reached 32.175 percent on Oct. 10, the highest since Bloomberg began compiling data in December 1995.

Bernanke Testimony

The dollar fell for the first time in four days against the euro and declined versus the pound on speculation a U.S. housing slump and a seizure in credit markets will tip the world's largest economy into recession.

Federal Reserve Chairman Ben S. Bernanke will testify at the House Budget Committee on the economic outlook and financial markets at 10 a.m. in Washington today. A rebound in U.S. growth won't happen right away as the government tries to unfreeze credit markets roiled by losses on mortgage derivatives, he said on Oct. 15.

``Pessimistic comments on the economy could knock the dollar lower,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``There's a good chance the U.S. is in a recession.''

Economists surveyed by Bloomberg in the first week of October said U.S. gross domestic product contracted at a 0.2 percent annual pace in the three months through September and will shrink at a 0.8 percent rate in the final quarter of the year. Declines in consumer spending will tip the economy into a recession, the survey showed.

Economic Slump

The U.S. index of leading indicators fell 0.1 percent last month as rising unemployment encouraged consumers to spend less, according to the median estimate in a separate Bloomberg survey before the Conference Board report at 10 a.m. New York time. The index, a gauge of the economy's direction in the next three to six months, has posted only two monthly gains this year.

Interest-rate futures show a 100 percent chance the Fed will lower its 1.5 percent target lending rate by at least a quarter-percentage point when the central bank announces its next policy decision on Oct. 29. That compares with no odds for a rate cut one month ago.

Technical analysis shows the dollar may rise to 103.10 yen this week, said Pak Lai Ng, a technical analyst at Forecast Singapore Pte.

The dollar is posed to gain as its daily moving average convergence/divergence chart has switched to a buy signal from a sell signal for the first time in two weeks, according to Ng. First resistance at 103.10 yen is near the dollar's Oct. 14 high, he said. Should the greenback rise above that level, it may then move to second resistance at 103.50 yen, which is near last month's low, he said. Resistance is where traders may place sell orders.

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