Yen Rises on Speculation Stocks to Weaken on Recession Concerns

By Stanley White and Ye Xie

Oct. 15 (Bloomberg) -- The yen rose for the first day in three against the euro on speculation the U.S. Treasury's plan to inject $250 billion into financial institutions to revive bank lending won't prevent a recession.

Japan's currency gained against the Australian and New Zealand dollars, two favorites of carry trades, as a worsening corporate-earnings outlook pushed down U.S. stocks a day after the biggest rally since the 1930s. The dollar fell against the yen before data that may show U.S. retail sales fell at a faster pace as job losses and falling home prices hurt consumption.

``The yen could get support from a stock market decline as it shows investors aren't completely ready to take on risk,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``The outlook for the U.S. economy doesn't look good, and this will drag the dollar lower.''

The yen rose to 137.90 per euro at 8:37 a.m. in Tokyo from 139.04 late yesterday in New York. The euro bought $1.3574 from $1.3619. The dollar traded at 101.58 yen from 102.07. The pound was quoted at $1.7390 from $1.7395. The yen may rise to 101.40 per dollar today, Soma forecast.

The Australian dollar fell to 70.71 yen from 74.19 yen late yesterday in Asia, while the New Zealand dollar declined by 3 percent to 62.97 yen.

In carry trades, investors borrow in currencies with low interest rates and invest in nations with higher rates. Japan's target rate of 0.5 percent is the lowest among major economies.

Treasury Secretary Henry Paulson yesterday urged banks receiving capital injections 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. European countries committed $1.8 trillion on Oct. 13 to guarantee loans and invest in lenders.

Yen vs. Euro

Japan's currency pared its loss versus the euro yesterday as the Standard & Poor's 500 Index lost 0.5 percent after increasing as much as 4.1 percent. The yen gained 7.7 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.

``The Band-Aid approach is going to buy them some time, but there's no quick fix,'' said Franco Marsico, the Chappaqua, New York-based head of Greenbriar Forecast Inc., a currency hedge fund with $120 million under management. ``I'd sell the euro, sell the dollar and buy the yen.''

U.S. retail sales fell 0.7 percent following a 0.3 percent decline the prior month, according to the median estimate in a Bloomberg survey before the Commerce Department's report later today in Washington. Figures on Oct. 17 may show housing starts fell to a 17-year low and falling fuel prices tempered increases in the cost of living.

Money Markets

The London interbank offered rate, or Libor, for three- month dollar loans dropped 12 basis points yesterday to 4.64 percent, reflecting increased willingness of banks to lend to each other. It was at 4.82 percent on Oct. 10, the highest level since December.

The dollar rose to the highest level versus the euro since March 2007 on Oct. 10, partly because banks' reluctance to lend to each other spurred a surge in demand for U.S. currency funding in global money markets.

The Bank of Japan said yesterday it will offer lenders an unlimited amount of dollars, one day after the Federal Reserve 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.''

The ICE futures exchange's Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, fell 0.6 percent to 81.36 yesterday.

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