By Ron Harui and Yasuhiko Seki
Feb. 23 (Bloomberg) -- The dollar fell for a third day against the euro on speculation the government will take larger stakes in U.S. banks, adding to signs the credit crisis may deepen the nation’s recession.
The dollar headed for its longest losing streak versus the euro this year after the Wall Street Journal reported the government may raise its stake in Citigroup Inc., citing unidentified people familiar with the situation. Japan’s currency may gain versus the euro on speculation the global slowdown will increase credit-market losses at international financial institutions, boosting demand for the yen as a haven.
“This news indicates that the financial crisis in the U.S. is deepening rather than easing,” said Takashi Matsumura, a Tokyo-based economist at Mizuho Research Institute Ltd., a unit of Japan’s second-largest banking group. “The dollar may fall toward 90 yen.”
The dollar dropped to $1.2909 per euro as of 1:54 p.m. in Tokyo from $1.2826 late in New York on Feb. 20. It weakened to 92.94 yen from 93.35 late last week. The U.S. currency slid to $1.4529 versus the pound from $1.4433, and declined to 1.1501 Swiss francs from 1.1560.
The euro traded at 119.97 yen from 119.68 yen in New York on Feb. 20. Europe’s single currency traded at 88.86 British pence from 88.91 pence, and advanced to 1.4848 francs from 1.4820.
Citigroup
The U.S. government may end up holding as much as 40 percent of Citigroup’s common stock, while bank executives prefer the stake to be closer to 25 percent, the Journal said.
Senate Banking Committee Chairman Christopher Dodd said on Feb. 20 some banks may have to be taken over for “a short time.” His House counterpart, Financial Services Committee Chairman Barney Frank, along with Republican Senator Jon Kyl rejected having the government step in to run banks.
Citigroup and Bank of America Corp., which received $90 billion in U.S. aid in four months, each tumbled as much as 36 percent on Feb. 20 on concern the U.S. may take over the banks. The Obama administration in response said a “privately held” banking system is the “correct way to go.”
The ICE’s Dollar Index, which tracks the greenback against six major trading partners such as the euro and the yen, declined for a third day, falling 0.5 percent to 86.079.
Limited Gains
Gains in the euro were limited by speculation financial turmoil in eastern Europe will deepen the recession in the 16 nations that share the currency.
Dutch Prime Minister Jan Peter Balkendende said on Feb. 22 that euro-region states are concerned about the stability of the single-currency area amid strains caused by the financial crisis.
“Of course we’re talking about this issue,” said Balkendende in an interview in Berlin after a meeting of European leaders in the Group of 20 states. “We’re aware of the fact that there are risks. We have to find the right approach.”
The cost of insuring Irish, Greek and Spanish debt against default has climbed to records, and mounting losses in eastern Europe among Austrian banks sent that nation’s bond-yield premiums to an unprecedented level.
“There is concern that credit losses at European financial institutions may swell due to their huge exposure to the Middle East and Eastern Europe,” said Takashi Kudo, director of foreign-exchange sales in Tokyo at NTT SmartTrade Inc., a unit of Nippon Telegraph & Telephone Corp. “This is likely to drag on the euro.”
The ECB will reduce the 2 percent main refinancing rate by half a percentage point at its March 5 meeting, according to the median forecast of economists surveyed by Bloomberg News.
European Central Bank President Jean-Claude Trichet will speak at a Securities Regulation Forum in Paris today, while ECB Executive Board member Jose Manuel Gonzalez-Paramo will appear at the fifth International Conference on ABC Europe and America.
Trade Deficit
Demand for the yen may peter out before a government report this week which economists say will show Japan posted a trade deficit for the fourth straight month.
“Japan’s trade balance is worsening, so the yen is losing some of its safe-haven status,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “There is a risk the yen may be sold” to 93.70 versus the dollar and 120 per euro today, he said.
The Finance Ministry’s custom-cleared trade balance statistics on Feb. 25 may show Japan logged a trade deficit of 1.18 trillion yen ($12.6 billion) in January, according to a Bloomberg News survey of 26 economists.
To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net.
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