Yen Falls to 1-Week Low Versus Euro as U.S. Plan May Help Banks

By Ron Harui

Jan. 19 (Bloomberg) -- The yen fell to the lowest in more than a week against the euro on speculation U.S. President-elect Barack Obama will back an increased financial-rescue effort that injects capital into banks.

Japan’s currency weakened for a third day against Australia’s dollar and a second versus New Zealand’s as the measures to bolster the world’s biggest economy give investors more confidence to borrow in yen and invest in riskier assets elsewhere. The yen declined against 15 of 16 most-active currencies as Obama’s team say they will use part of the $350 billion remaining from the Troubled Asset Relief Program to help stem foreclosures, according to people familiar with the matter.

“Hopes over the Obama administration are improving risk- taking appetite,” said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France’s second-largest bank by market value. “The yen is being sold.”

The yen declined to 120.90 per euro as of 10:40 a.m. in Tokyo from 120.37 late in New York on Jan. 16. It reached 122.17, the lowest level since Jan. 9. Japan’s currency traded at 90.83 against the dollar from 90.72 last week. It touched 91.30, the least in more than a week.

Against the dollar, the euro advanced to $1.3334 from $1.3267 in New York at the end of last week. The British pound climbed to $1.4823 from $1.4733 and the Swiss franc strengthened to 1.1161 from 1.1197. Trading may be more subdued than usual because of the U.S. public holiday today, Saito said.

The Nikkei 225 Stock Average rose 0.6 percent and the MSCI Asia-Pacific Index of regional shares advanced 0.7 percent.

‘Aggregator Bank’

Japan’s currency weakened the most against Norway’s krone, New Zealand’s dollar and Australia’s dollar as U.S. policy makers signaled the government will create a government-backed “bad” or “aggregator” bank to acquire hundreds of billions of dollars of troubled securities held by lenders.

“A lot of work has been done on an aggregator bank” and other ways of using the $700 billion financial-rescue fund “to let it go further when it comes to dealing with illiquid assets,” Treasury Secretary Henry Paulson told reporters on Jan. 16 in Washington.

The yen slid 1.1 percent to 13.2108 versus the krone, 1.1 percent to 50.09 against New Zealand’s dollar and 1 percent to 61.67 versus Australia’s dollar from late in New York on Jan. 16.

“We’re going to see Obama coming out with some new stimulus-type packages and a lot of measures to support the economy in the U.S.,” Jim Vrondas, manager of corporate business at online foreign-exchange dealer OzForex Ltd. in Sydney, said in an interview with Bloomberg Television. “Risk appetite at the moment is looking pretty good. In the short term, the yen is going to remain a little bit weak.”

Benchmark Rates

Benchmark interest rates are 3 percent in Norway, 2 percent in Sweden 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 currency market moves erase those profits.

Losses in the yen may be curbed on speculation more than $1 trillion of asset writedowns worldwide and rising credit losses will hurt earnings at companies and deter investors from buying riskier assets.

U.S. companies reporting results this week after the Jan. 19 Martin Luther King Day holiday include International Business Machines Corp., Johnson & Johnson, United Technologies Corp., Microsoft Corp. and General Electric Co. Bank of America Corp. posted a fourth-quarter loss of $1.79 billion on Jan. 16, its first since 1991.

‘Likely Be Bad’

“A lot of firms will release results this week and their fourth-quarter earnings will likely be bad,” said Masashi Kurabe, head of currency sales and trading in Hong Kong at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan’s largest publicly traded bank by assets. “These worries are probably causing the yen to recover.”

The pound gained for a fourth day against the yen and the dollar after U.K. Prime Minister Gordon Brown said yesterday the government will announce a package of measures to encourage bank lending today.

“There’s some optimism about the U.K. government’s plan,” said Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore. “This is positive for the pound,” which may rise to 137.00 yen and $1.50 today, he said.

The measures are aimed at “getting lending moving in the economy” and will include banks declaring bad debts and losses, Brown said in Egypt. The government is also due to unveil plans to guarantee lending in for households and companies.

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