Yen Falls as Gain in U.S. Stock Futures Spurs Demand for Yield

By Ron Harui

Jan. 21 (Bloomberg) -- The yen fell, reversing earlier gains, as an advance in U.S. stock futures sparked optimism that investors will increase purchases of higher-yielding assets funded in the Japanese currency.

The yen snapped a two-day winning streak against the dollar after U.S. Treasury Secretary-nominee Timothy Geithner urged Congress to pass a stimulus plan with “sufficient strength” to revive the economy. Japan’s currency also ended two days of gains versus the euro after a technical chart signaled its 8.5 percent advance this month was excessive.

“There’s talk that some investors are selling the yen for dollars and euros as they seem to perceive the dollar-yen and the euro-yen reached attractive buying levels,” said Toshihiko Sakai, head of foreign-exchange trading in Tokyo at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan’s biggest bank. “The yen has also risen quite a bit so some players may be reducing long positions,” he said. A long position is a bet an asset will gain.

The yen fell to 89.91 versus the dollar as of 6:27 a.m. in London from 89.76 late in New York yesterday. It earlier rose as high as 89.69. Japan’s currency dropped to 116.40 per euro from 115.85 late yesterday, after touching 115.30, the strongest since Oct. 28. The yen weakened to 125.16 against the British pound after reaching a record high of 124.02.

Bailout Program

Geithner pledged to “reform” the U.S. government’s $700 billion bailout program, saying “the ultimate costs of this crisis will be greater” if adequate steps are not taken now. He spoke in prepared testimony for a Senate Finance Committee hearing scheduled for today in Washington. Futures on the Standard & Poor’s 500 Index rose 0.9 percent, pointing to a gain when U.S. markets open.

The euro advanced to $1.2951 from $1.2904 in New York yesterday. Europe’s single currency climbed to 93.02 British pence from 92.62 pence. The pound rose to $1.3975, after dropping to $1.3811, the lowest since 2001.

Japan’s currency fell from near the highest level in a week against the dollar after U.S. President Barack Obama called on Americans in his inaugural address yesterday to take responsibility for rebuilding the economy.

Obama has pledged $825 billion to revive the world’s largest economy. His plan would provide tax cuts totaling $275 billion, including a $500 payroll tax cut for individuals and $1,000 for families. It would also spend $550 billion on initiatives ranging from renewable energy to jobless benefits.

‘Very Large’

“The scale of the stimulus is very large and is likely to result in the U.S. pulling out of recession first,” said Akifumi Uchida, deputy general manager of the marketing unit at Sumitomo Trust & Banking Co. in Tokyo. “It’s a plus for the dollar,” which may strengthen to around 91 yen in coming days, he said.

The yen also weakened as the euro’s 14-day stochastic oscillator against the currency declined to 11, according to data compiled by Bloomberg. A level below 20 suggests a currency may have weakened too quickly and is poised to rebound.

“The yen looks overbought,” said Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore. “There’s a bit of unwinding in long positions.”

Japan’s currency earlier rose to a record against the pound on concern the global slowdown will worsen.

The number of people in the U.K. receiving jobless benefits rose by 81,000 in December, the most since March 1991, according to a Bloomberg News survey of economists. The Office for National Statistics issues the data at 9:30 a.m. in London today.

Germany’s producer prices fell 1.2 percent in December, after a 1.5 percent decline in November, another Bloomberg survey shows. The Federal Statistics Office will publish the report at 8 a.m. in Wiesbaden today.

‘Downside Risk’

“The market is reflecting the downside risk of the global economy and an increase in risk aversion,” said Toru Umemoto, chief currency analyst in Tokyo at Barclays Capital. “The yen carry trade is being unwound and the yen is the beneficiary. This move will continue for a long time.”

Australia’s dollar slid 1.7 percent to 58.82 yen and New Zealand’s currency slumped 1 percent to 47.47 yen from late in Asia yesterday. The yen may strengthen to 84 yen against the dollar and 105 per euro in three months, Umemoto said.

Benchmark interest rates are 4.25 percent in Australia and 5 percent in New Zealand, compared with 0.1 percent in Japan, encouraging investors to borrow in yen and buy higher-yielding assets elsewhere.

In a carry trade, investors get funds in a country with low borrowing costs and invest in one with higher rates. The risk is that currency market moves erase those profits.

‘Losses Have Accelerated’

The pound has fallen 4.5 percent against the dollar in the past five days as concern about losses in the U.K. financial system deepened.

The British government announced this week a 50 billion pound ($73 billion) plan to stabilize the financial industry, following a 50 billion pound bank recapitalization in October.

“The pound’s losses have accelerated even as the U.K. government announces new measures to prop up the U.K. banking system,” Ray Farris, London-based head of foreign-exchange strategy research, and Daniel Katzive, a New York-based senior currency strategist, at Credit Suisse Group, wrote in a research note yesterday. “We are currently maintaining our three-month pound forecast of 1.376.”

To contact the reporters on this story: Ron Harui in Singapore at rharui@bloomberg.net.