Yen Declines as Obama Plan Reduces Currency’s Haven Appeal

By Ye Xie and Bo Nielsen

Dec. 8 (Bloomberg) -- The yen fell the most in two weeks against the euro as U.S. President-elect Barack Obama’s pledge to spend more on the nation’s infrastructure boosted stocks and reduced the currency’s haven appeal.

Japan’s yen also slid against the Swedish krona and the Australian dollar as U.S. lawmakers neared an agreement on bridge loans for General Motors Corp. and Chrysler LLC, prompting speculation investors will unwind carry trades. The dollar fell against the euro as Obama’s plan reduced pressure on banks to hoard the U.S. currency amid the credit crisis.

“We are seeing a strong return to risk appetite,” said Matthew Strauss, a senior currency strategist in Toronto at RBC Capital Markets Inc., a unit of Canada’s biggest bank by assets. “The yen is under pressure. The yen very much depends on the swings of risk appetite and development of financial markets going forward.”

The yen weakened 1.8 percent to 120.30 per euro at 9:47 a.m. in New York, from 118.18 on Dec. 5. It dropped as much as 2.3 percent, the biggest intraday decline since Nov. 24. The yen fell 0.4 percent to 93.24 against the dollar from 92.83. The euro rose 1.5 percent to $1.2908 from $1.2718.

The dollar will trade in a range of $1.25 per euro to $1.30, and the yen will fluctuate from 92 to 96 versus the dollar in the next few weeks, according to Strauss.

Weaker Yen

Japan’s currency dropped 3 percent to 61.85 versus the Australian dollar and 3.9 percent to 11.58 against the krona on speculation investors will unwind 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 4.25 percent in Australia and 2 percent in Sweden.

The Standard & Poor’s 500 Index jumped 3.5 percent, while Europe’s Dow Jones Stoxx 600 Index advanced 5.2 percent. The yen traded in inverse relation with the European index more than 90 percent of the time in the past month, data compiled by Bloomberg show.

Obama, in a television interview yesterday on NBC, reiterated his commitment to the biggest investments in the nation’s infrastructure since President Dwight D. Eisenhower created the interstate highway system a half-century ago. The U.S. president-elect takes office Jan. 20.

“The prospect of a rebound of risk appetite remains in place,” analysts led by Hans-Guenter Redeker, London-based global head of currency strategy at BNP Paribas SA, France’s biggest bank, wrote in a research note today. “The yen is likely to be the weakest currency in town.”

Auto Rescue

The U.S. House and Senate will meet this week to debate extending $15 billion in loans to GM and Chrysler as a global recession crimps consumer spending, making it difficult for the automakers to pay their bills. U.S. car companies originally requested $34 billion.

The yen may resume its rally on speculation a U.S. rescue of GM and Chrysler will not prevent the two firms from filing for bankruptcy protection or being acquired, said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker.

GM is willing to accept strict conditions for a U.S. loan to stay afloat, including a promise to return the money and file for bankruptcy if the company doesn’t fulfill the terms, Chairman Richard Wagoner said Dec. 5.

“The bias is for the yen to appreciate,” said Ishikawa. “There’s no guarantee that this bailout will come together and prevent these companies from going under. That discourages any sort of risk trade and boosts the yen.” The yen may advance to 92.50 per dollar and 117.60 against the euro today, he said.

European Central Bank council member Ewald Nowotny said the bank won’t necessarily cut interest rates again next month to stimulate the economy.

ECB Rate

“We’ll observe how things are working, what’s happening, and then we’ll see,” Nowotny said in an interview in Wuerzburg, Germany, on Dec. 5. “The ECB certainly doesn’t want to be pressured by expectations.”

The ECB lowered its benchmark rate to 2.50 percent from 3.25 percent on Dec. 4 after data last month showed Europe’s inflation rate fell by the most in almost two decades.

The cooling global economy is halting the spread of monetary union into eastern Europe and may lead to another year of losses for the Polish zloty, Hungarian forint and Czech koruna, New York-based Morgan Stanley and UBS AG in Zurich said.

The zloty fell 21 percent against the euro since July as Poland headed for its biggest economic slowdown in almost a decade, while Hungary turned to the World Bank, International Monetary Fund and European Union for a bailout as the forint weakened 16 percent. The koruna’s volatility almost tripled as it fell 13 percent. The two-year mandatory trial period before adopting the euro allows swings of no more than 15 percent.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net