Yen Weakens as Stocks Rebound, Reviving Demand for Higher Yield

By Andrew Macaskill

Nov. 21 (Bloomberg) -- The yen declined as stocks rebounded on speculation that a sale of Citigroup Inc. will reduce risk in the financial system, stoking demand for higher-yielding assets financed with loans in Japan.

The yen also weakened against the Australian dollar, a favorite of so-called carry trades, after the Reserve Bank of Australia bought its own currency for at least the fifth time in four weeks. The dollar dropped versus the euro on speculation the Federal Reserve will cut interest rates and flood the financial system with cash as a recession causes prices to fall.

``The main driver is the rebound in equity markets that are gaining on speculation Citigroup could merge or sell off,'' said Lee Hardman, a currency strategist in London at Bank of Tokyo- Mitsubishi Ltd. ``This is taking some of the steam out of the yen's recent rally.''

The yen fell to 94.82 per dollar as of 7:25 a.m. in New York from 93.69 yesterday, trimming this week's gain to 2.3 percent. The currency may strengthen to 90 against the dollar by year-end, Hardman said. It dropped to 119.26 per euro from 116.68. The euro bought $1.2579 from $1.2453, paring its weekly decline to 0.2 percent.

Japan's currency weakened 3.1 percent versus Australia's dollar to 58.99 yen. The Australian dollar traded at 62.19 U.S. cents from 61.07 cents.

The MSCI Asia-Pacific Index of regional shares gained 3.1 percent, after earlier sliding as much as 2.3 percent. Europe's Stoxx 600 advanced 0.6 percent and U.S. stock-index futures climbed, pointing to gains after the Standard & Poor's 500 Index yesterday closed at an 11-year low.

Attractive Yen

Citigroup's board meets today to discuss the bank's options, a person familiar with the matter said, after Chief Executive Officer Vikram Pandit's efforts to rebuild investor confidence failed to halt the stock's descent to a 15-year low. The panel may consider selling off pieces of the bank or the entire company, the Wall Street Journal reported, citing people familiar with the matter.

The RBA bought a record A$3.15 billion in the market in October, it said yesterday, as the Australian dollar touched 60.10 U.S. cents, the lowest level since 2003. An RBA spokesman confirmed the bank bought Australian dollars today.

The yen has gained 17 percent against the dollar this year and 37 percent versus the euro as global recession concerns spurred a reduction in so-called carry trades, where investors get funds in a country with low borrowing costs and invest in one with higher interest rates.

Recession Concern

The Bank of Japan kept its benchmark rate at 0.3 percent today and said it will consider pumping more money into the financial system to prop up an economy that fell into a recession last quarter. Japan's rate compares with 6.5 percent in New Zealand and 5.25 percent in Australia.

``There's strong possibility that the yen will continue appreciating as the global recession may deepen,'' said Tohru Sasaki, chief currency strategist in Tokyo at JPMorgan Chase & Co. and a former chief foreign-exchange trader at the Bank of Japan. ``It's an environment where losses in cross-yen currencies are likely to be even bigger than those in the dollar-yen.''

The yen will advance to 87 against the dollar and 103 per euro by year-end, JPMorgan forecast.

``The yen will retain its attractiveness as the world potentially faces a long, long recession,'' said Neil Mellor, a currency strategist in London at Bank of New York Mellon Corp., which has $23 trillion of assets.

Dollar Gains

Gains in the dollar may be limited before speeches by Fed officials today. Richmond Fed President Jeffrey Lacker speaks about the economy at 8:15 a.m. in Bethesda, Maryland. Philadelphia Fed President Charles Plosser and Chicago Fed President Charles Evans also speak today.

The Fed's record injections of liquidity to stabilize the financial system have driven the overnight lending rate between banks to less than half the 1 percent target set by officials last month. The gap is shifting investor focus toward the amount of money in the system as a better gauge of Fed intentions.

``I don't think there's a way of avoiding the fact that extremely low interest rates and excess liquidity are negative for the dollar,'' said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney.

Euro Boost

The euro rose versus the yen, the dollar and the Swiss franc as equity-market gains cut demand for haven currencies, said Paul Robson, a currency strategist at Royal Bank of Scotland in London.

``The bounce in stocks is helping to drive the euro higher,'' he said. ``The relationship between currencies and equity markets remains very much intact. Risk sentiment is the main force driving the currency market at the moment.''

The euro may gain 16 percent against the dollar in the next 12 months as Chinese demand drives up prices for oil, reducing the U.S. currency's attractiveness, Barclays Capital said.

Two-thirds of the euro's 22 percent slide since the July peak of $1.6038 stems from falling oil prices, Barclays said. Crude oil may rebound after dropping 67 percent from a record $147.27 a barrel on July 11 as the Chinese economy expands, it said.

To contact the reporters on this story: Andrew Macaskill in London at amacaskill@bloomberg.net