Yen Rises on Concern U.S. Bank Rescue Plan Won't Stop Recession

By Ron Harui and Stanley White

Oct. 15 (Bloomberg) -- The yen rose for the first day in five against the dollar on speculation the U.S. Treasury's $250 billion investment in financial institutions won't prevent a recession in the world's biggest economy.

Japan's currency also gained versus the euro as U.S. and Asian stocks fell, damping investors' confidence in higher- yielding assets. The dollar traded near a one-week low against the euro before data that economists predict will show U.S. retail sales declined at a faster pace as job losses and a housing slump curb spending.

``A global economic slowdown could be beneficial for the yen,'' said Toru Umemoto, chief currency analyst at Barclays Capital in Tokyo. ``It will take a long time for policy makers to execute various bailout measures. Once people in the market realize this, that could increase risk aversion.''

The yen climbed to 101.75 per dollar as of 7:11 a.m. in London from 102.07 late yesterday in New York. The currency rose to 138.52 per euro from 139.04, set for the biggest gain in a week. The dollar was little changed at $1.3616 per euro. It fell yesterday to $1.3769, the lowest since Oct. 9.

Against the yen, South Korea's won slipped 3.9 percent to 12.18293 from late yesterday in New York, Norway's krone weakened 0.6 percent to 16.1765 and Mexico's peso lost 0.3 percent to 8.224.

In carry trades 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.

Volatility Rises

Japan's currency also gained as volatility implied by one- month dollar-yen options climbed to 22.06 percent from 20.54 percent yesterday, indicating a larger 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.

Treasury Secretary Henry Paulson urged banks receiving capital injections yesterday to use the funds to spur economic growth. People familiar with the plan said nine financial institutions, including Citigroup Inc. and Goldman Sachs Group Inc., will get $125 billion within days. European nations committed $1.8 trillion on Oct. 13 to guarantee loans and invest in lenders.

The yen snapped two days of losses versus the euro as the MSCI Asia-Pacific Index of regional shares slipped 0.9 percent after the Standard & Poor's 500 Index lost 0.5 percent yesterday. The yen climbed 8 percent versus the euro this month as mounting credit-market losses encouraged investors to shed higher- yielding assets funded by low-cost loans in Japan.

``Japan isn't as adversely affected, like the U.S. is, by the crisis,'' said Kenichi Yumoto, head of foreign-exchange sales at Societe Generale SA in Tokyo. ``The yen is a safe-haven currency and is likely to be bought.''

U.S. Retail Sales

The dollar yesterday reached a one-week high of 103.07 yen, before retreating on concern U.S. government reports will show that the economic slowdown is deepening.

U.S. retail sales fell 0.7 percent in September following a 0.3 percent decline the prior month, according to the median estimate of economists surveyed by Bloomberg News. The Commerce Department will release the data at 8:30 a.m. in Washington. Figures on Oct. 17 may show housing starts fell to a 17-year low.

``Concerns over a U.S. recession may now intensify, as those over a financial crisis have abated for the time being,'' said Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland in Tokyo and a former Bank of Japan currency trader. ``These worries may lead to dollar selling, yen buying.''

Euro May Fall

The common European currency may drop 13 percent versus the yen by the end of the year as global credit markets will remain depressed even after U.S. and European officials made as much as $3 trillion available to unclog lending, Citigroup Global Markets Inc. said.

The euro may reach 120 yen as investors favor the relative safety of Japan's currency, reinforcing technical charts that signal the euro is vulnerable, said Tom Fitzpatrick, global currency head of strategy at Citigroup Global Markets in New York.

``You can't have the amount of fear we've just had in the last three weeks and think people are just going to go roaring back to put on risk trades,'' said Fitzpatrick. ``Equities have got hit because of the problem. They in themselves haven't been the problem. The problem has been credit.''

Money Markets

The London interbank offered rate, or Libor, which banks charge each other for three-month dollar loans, remained 314 basis points above the Federal Reserve's target rate of 1.5 percent yesterday. The dollar Libor-OIS spread, a gauge of demand for cash, narrowed 13 basis points to 341 basis points. It was at 105 basis points on Sept. 15 and 24 basis points on Jan. 24.

The Bank of Japan said yesterday it will offer lenders an unlimited amount of dollars, one day after the Fed said the European Central Bank, Bank of England and Swiss National Bank would offer European banks as many dollars as they want at fixed interest rates against ``appropriate collateral.''

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