Dollar Slumps Below 90 Yen as U.S. Auto Bailout Fails in Senate

By Stanley White

Dec. 12 (Bloomberg) -- The dollar slumped below 90 yen for the first time in 13 years after the U.S. Senate rejected a $14 billion bailout for the nation’s automakers.

The greenback headed for a sixth week of declines versus the yen as General Motors Corp. and Chrysler LLC failed to obtain the funds they need to survive until next year. Japan isn’t considering intervening in currency markets now, Finance Minister Shoichi Nakagawa told reporters in Tokyo today.

“The dollar is dropping like a rock,” said Masahiro Sato, joint general manager of the treasury division in Tokyo at Mizuho Trust & Banking Co., a unit of Japan’s second-largest publicly listed lender. “This is a big blow to confidence in the U.S. economy. Bankruptcy protection for U.S. automakers may be the only option left.”

Against the yen, the U.S. currency weakened to 88.53, the lowest since Aug. 2, 1995, before trading at 89.65 as of 7:27 a.m. in London from 91.45 late yesterday in New York. The euro fell to 118.80 yen from 122.09 yen and to $1.3253 from $1.3352 yesterday as investors pared holdings of higher-yielding currencies. The dollar may weaken to 85 yen today, Sato said.

The dollar is heading for a 20 percent drop against the yen this year, the most since 1987, as $986 billion of credit-market losses sparked a seizure in money markets and threw the U.S. economy into a recession. The dollar dropped 3.4 percent against the yen this week and 4.1 percent against the euro.

Shares Plunge

Asian stocks fell, with the MSCI Asia Pacific Index of regional shares declining 3.5 percent. Standard & Poor’s 500 Index futures weakened by 4.2 percent, prompting investors to pare carry trades in which they buy higher-yielding assets with low-cost loans from Japan or Switzerland. The yen rose to 58.63 per Australian dollar from 61.42, while the Swiss franc gained 0.6 percent to 1.5715 versus the euro.

“Dollar selling could easily stretch into next week on disappointment over the U.S. government’s response,” said Kengo Suzuki, currency strategist in Tokyo at Shinko Securities Co. “The chances of intervention would increase should the dollar reach 80 yen next week.”

Japan last intervened on its own when it sold a record 20.4 trillion yen ($227 billion) in 2003 and 14.8 trillion yen in the first quarter of 2004, when the yen rose as high as 103.42 per dollar.

Currency Intervention

The last time the Group of Seven, which comprises the U.S., Japan, Germany, the U.K., France, Italy and Canada, intervened in the currency market was on Sept. 22, 2000, when they bought the euro after it tumbled 27 percent from its 1999 debut. The G- 7 last propped up the dollar in 1995, when it sank to a post- World War II low of 79.75 yen. Central banks intervene when they buy or sell currencies to influence exchange rates.

The Senate rejected the legislation late yesterday in Washington after negotiations on an alternate plan collapsed. The bill passed the House on Dec. 10. “I dread looking at Wall Street tomorrow,” Majority Leader Harry Reid said on the Senate floor. “It’s not going to be a pleasant sight.”

Democrat Christopher Dodd said the unresolved issue was a Republican demand that unionized workers accept lower wages next year, rather than later, to match pay at foreign carmakers in the U.S., such as Toyota Motor Corp. President George W. Bush’s administration will evaluate options on aid for U.S. automakers, a White House spokesman said.

“There are no incentives to buy the dollar right now,” said Hideki Amikura, deputy general manager of foreign exchange at Nomura Trust and Banking Co. in Tokyo, a unit of Japan’s largest brokerage. “U.S. politicians can’t even agree on stopgap measures for the auto industry.”

The dollar may decline to $1.38 per euro and 88 yen this month, Amikura said.

Fed Policy

The dollar also fell on speculation the Federal Reserve will lower interest rates toward zero to combat a recession, reducing the appeal of the country’s assets.

Futures on the Chicago Board of Trade showed yesterday an 82 percent chance the Federal Reserve will trim its 1 percent target lending rate to 0.25 percent at its Dec. 16 meeting, compared with 64 percent odds a week ago. Treasuries rose today, pushing two-year yields to a record low of 0.67 percent.

“The dollar will become a weak currency going into next year due to super-low interest rates and where Treasury yields are,” said Tohru Sasaki, chief strategist in Tokyo at JPMorgan Chase & Co. and a former chief currency trader at the Bank of Japan. “It’s difficult to attract investment into the country.”

The dollar may decline to 88 yen in the first quarter, he said.

Dollar Index

The ICE’s Dollar Index, which tracks the greenback against the euro, the yen, the pound, the Canadian dollar, the Swiss franc and Sweden’s krona, was little changed at 83.935. It touched 88.463 on Nov. 21, the highest since April 2006.

Goldman Sachs Group Inc. lowered its forecast for the dollar against the euro and the yen for 2009, saying the repatriation of overseas assets by U.S. investors and demand for the greenback for funding are “diminishing.”

The U.S. currency will weaken to $1.45 per euro and 90 yen, strategists led by Jens Nordvig in New York wrote in a research note yesterday. The firm previously forecast that the dollar would trade at $1.30 and 105 yen by the end of next year.

The cost of borrowing in dollars for three months in London fell yesterday to the lowest level in more than four years. The London interbank offered rate, or Libor, that banks say they charge each other for such loans slid 0.1 percentage point to 2 percent, British Bankers’ Association data showed.

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