Dollar Slumps Versus Yen as Automakers Raise Recession Concern

By Jamie McGee and Michael J. Moore

Dec. 13 (Bloomberg) -- The dollar fell to a 13-year low against the yen on concern General Motors Corp. and Chrysler LLC will collapse into bankruptcy without a rescue from the Bush administration.

Japan’s yen also pared its gain against major currencies on speculation investors will curb so-called carry trades and after Finance Minister Shoichi Nakagawa said the country isn’t considering foreign-exchange intervention. The euro posted its biggest weekly gain against the dollar since the currency’s 1999 debut on bets the Federal Reserve will lower borrowing costs to near zero next week while European Central Bank officials suggested they may be approaching the end of interest-rate cuts.

“We would expect the yen to remain strong,” Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York, said in an interview on Bloomberg Television. “The auto situation adds to that.”

The dollar fell 1.8 percent this week to 91.21 yen, from 92.83 on Dec. 5. It touched 88.53 yesterday, the lowest level since August 1995. The U.S. currency’s six weeks of declines is the longest stretch of losses since December 2004.

The euro increased 5.1 percent to $1.3369 from $1.2718, a record weekly gain. The euro advanced 3 percent to 121.83 yen from 118.18.

Won, Sterling

The South Korean won was the biggest gainer versus the dollar this week, climbing 7.5 percent to 1,372.45. South Korea agreed on bilateral currency swap accords with Japan and China to protect financial stability in Asia.

Sterling fell to 89.97 pence per euro, the weakest since the European currency began trading. HBOS Plc said this year’s charge for bad loans rose to 5 billion pounds ($7.5 billion).

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 4 percent to 83.644. It touched 88.464 on Nov. 21, the highest since April 2006.

“The dollar’s status as a safe-haven currency is being challenged,” said Bilal Hafeez, global head of currency strategy in London at Deutsche Bank AG.

GM and Chrysler won a reprieve until January after the Bush administration said yesterday it may finance an industry rescue with funds set aside for banks. The White House’s reversal on tapping the Troubled Asset Relief Program for short-term aid followed the Senate’s rejection of a short-term loan package for GM and Cerberus Capital Management LP’s Chrysler.

U.S. retail sales fell in November for a record fifth consecutive month, led by slumping auto dealers and service stations. The 1.8 percent decrease reported yesterday by the Commerce Department extended the longest stretch of declines since records began in 1992.

Rate Expectations

Traders expect the Fed to cut borrowing costs to the lowest ever at its Dec. 16 meeting. Futures on the Chicago Board of Trade show a 74 percent chance the central bank will lower the 1 percent target rate to 0.25 percent. The rest of the bets are for a reduction to 0.5 percent.

European Central Bank council member Axel Weber said on Dec. 11 he “would like to avoid” lowering the euro zone’s interest rate below 2 percent. The ECB reduced the main refinancing rate by 0.75 percentage point to 2.5 percent, the most in its history.

The U.S. currency fell 18 percent against the yen this year, the most since 1987, as $986 billion of credit-market losses at the world’s largest financial companies since the start of 2007 sparked a seizure in money markets and threw the U.S. economy into a recession.

Yen Strength

“We still think there is room for the yen to strengthen,” said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. “Market volatility will likely remain high and will contribute to yen strength.” The yen will appreciate to below 90 per dollar again in coming weeks, he forecasts.

Nakagawa told reporters in Tokyo yesterday that Japan isn’t considering currency intervention right now. 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 gained to 103.42 per dollar.

Governments intervene in currency markets when they buy or sell currencies to influence exchange rates.

The pound weakened after HBOS, which agreed to a takeover by Lloyds TSB Group Plc, said bad loans will keep rising as credit conditions deteriorate, signaling the U.K. economic slump is intensifying. The implied yield on the March short-sterling futures contract fell as traders increased bets the Bank of England will keep cutting interest rates to revive the economy.

The Bank of England cut its interest rate to 2 percent on Dec. 4, from 5.5 percent at the start of the year, as policy makers tried to limit the fallout from the global financial crisis.

To contact the reporters on this story: Jamie McGee in New York at jmcgee8@bloomberg.net; Michael J. Moore in New York at mmoore55@bloomberg.net