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

By Kim-Mai Cutler and 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 General Motors Corp. and Chrysler LLC.

The U.S. currency headed for a sixth week of declines versus the yen as the automakers failed to obtain the funds they need to survive until next year. The yen rose against all the major currencies as Finance Minister Shoichi Nakagawa told reporters in Tokyo today Japan isn’t considering intervening in currency markets now.

“We’re headed toward 80,” said Bilal Hafeez, the global head of currency strategy in London at Deutsche Bank AG, the world’s biggest foreign-exchange trader. “The dollar’s status as a safe-haven currency is being challenged.”

The dollar weakened to 88.53 yen, the lowest level since August 1995, before trading at 90.35 at 7:12 a.m. in New York, from 91.45 yesterday. The euro fell 1.4 percent to 120.39 yen from 122.09 and 0.2 percent to $1.3323 from $1.3352 as investors pared holdings of higher-yielding currencies.

The dollar fell 19 percent 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 2.6 percent against the yen this week and 4.6 percent against the euro.

“The yen is doing well not just because of risk aversion,” said David Woo, global head of foreign-exchange strategy at Barclays Capital in London. “One could make the case that Japanese automakers are going to be the big winners from this bailout coming apart.”

Yen’s Gains

Japan’s yen advanced 3.6 percent to 59.32 versus the Australian dollar and 3.4 percent to 8.87 against the South African rand on speculation investors will unwind carry trades, in which they get funds in a country with low borrowing costs and buy assets where returns are higher. Japan’s 0.3 percent target lending rate compares with 11.5 percent in South Africa and 4.25 percent in Australia.

The MSCI World Index lost 1.3 percent, while Standard & Poor’s 500 Index futures weakened 4.4 percent.

“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.”

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.

G-7 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 yen’s gain “is raising the risk of intervention, though at the current juncture we think that action is unlikely and right now would be prone to failure” a team of strategists at Societe Generale SA led by Vincent Chaigneau in London wrote in a research report today.

Implied volatility on one-month dollar-yen options rose by the most in seven weeks to 22.53 percent. An increase in volatility makes it more difficult to predict carry-trade profit, increasing risk.

Bailout Rejected

The Senate rejected the legislation late yesterday in Washington after negotiations on an alternative 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.

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 Fed 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.

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, fell 0.3 percent to 83.62. It touched 88.463 on Nov. 21, the highest since April 2006.

The greenback may rally in the first half of next year and then underperform most currencies as global growth recovers in the second half of 2009, wrote analysts at Morgan Stanley, led by London-based Stephen Jen.

The dollar may strengthen to $1.10 against the euro by the second quarter of next year and then fall to $1.20 by year-end, according to Morgan Stanley.

The U.S. currency will start “giving back some of its gains in the second half, assuming the global economy bottoms in the summer,” the analysts wrote in a note to clients.

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 dollar will weaken to $1.45 per euro and 90 yen by the end of next year, 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.

To contact the reporters on this story: Kim-Mai Cutler in London at kcutler@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net