By Ron Harui
Feb. 11 (Bloomberg) -- The dollar and the yen rose for a second day against the euro on speculation the U.S. government’s bank rescue plan will fail to revive lending, boosting demand for the two currencies as a haven.
The yen gained versus South Korea’s won and Sweden’s krona on the prospect investors will sell higher-yielding assets after Treasury Secretary Timothy Geithner pledged as much as $2 trillion in financing without providing details on how he will help banks cope with toxic assets. The euro also fell before a report tomorrow that may show European industrial production fell the most in almost 23 years.
“The plan is not the quick fix investors were hoping for, so there’s obvious disappointment,” said Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington. “Risk aversion will probably spur them to seek the relative safety of the dollar and the yen in the near term.”
The dollar rose to $1.2874 per euro as of 10:55 a.m. in Singapore, after gaining 0.7 percent yesterday. The yen climbed to 116.32 per euro after appreciating 1.8 percent, the first advance in four days. Japan’s currency traded at 90.35 per dollar from 90.47.
Trading may be subdued today because of a public holiday in Japan, Hampton said.
The yen advanced 0.9 percent to 15.42456 against the won and strengthened 0.5 percent to 10.916 versus the krona. Japan’s benchmark interest rate of 0.1 percent compares with 2.5 percent in South Korea and 2 percent in Sweden, encouraging investors to borrow in yen and invest in assets elsewhere.
Stocks Fall
Asian stocks fell for a second day, with the MSCI Asia- Pacific excluding Japan Index tumbling 2.4 percent. U.S. shares slid yesterday as the Standard & Poor’s 500 Index lost 4.9 percent, the most since President Barack Obama was inaugurated, on concern the government’s bank rescue won’t work.
Implied volatility on one-month euro-yen options rose to 26.3 percent from 26.2 percent, indicating the risk remains high of exchange-rate fluctuations that can erode profit on so-called carry trades. The level was 13.9 percent a year ago.
The U.S. Treasury is creating a Public-Private Investment fund, with an initial capacity of $500 billion that may grow to $1 trillion, to provide financing for private investors to buy distressed securities, Geithner said in Washington yesterday.
The pound weakened versus 10 of the 16 most-active currencies today. Sterling declined 0.2 percent to $1.4511, and dropped 0.3 percent to 131.17 yen.
Gains Reversed
“A number of currencies have benefited in recent days from anticipation that a bad bank structure would put a floor under U.S. asset prices,” Daniel Katzive, a senior currency strategist in New York at Credit Suisse Group, wrote in a research note yesterday. “A primary beneficiary of bad bank anticipation has been the British pound, and the lack of a convincing plan at this time should result in a reversal of recent pound gains.”
The U.S. Senate voted 61-37 to approve a separate $838 billion economic stimulus package yesterday, clearing the way for negotiations with the House over a compromise plan lawmakers said they want to send to President Barack Obama quickly.
The euro declined on speculation industrial output in the region dropped by the most since January 1986 when Bloomberg began compiling the data, backing the case for the European Central Bank to cut interest rates.
‘Weakening Trend’
“Growth conditions will remain in a clear weakening trend,” Ashley Davies, a currency strategist in Singapore at UBS AG, the world’s second-largest foreign-exchange trader, wrote in a research note today. “We remain of the view that the single currency will remain in a broad downtrend, in particular versus the dollar.”
The European Union’s statistics office may say tomorrow that industrial production fell 9.5 percent in December from a year earlier, after a 7.7 percent decline in November, according to a Bloomberg News survey of economists.
Investors added to bets the ECB will lower borrowing costs from 2 percent at its March 5 meeting. The yield on the three- month Euribor interest rate futures contract due in March fell to 1.745 percent yesterday from 1.855 percent a week earlier.
The euro weakened versus 13 of the 16 major currencies on concern the financial turmoil in Europe will worsen. Poland may introduce as early as next month a regulation canceling some currency option transactions, Economy Ministry Waldemar Pawlak said in Warsaw yesterday.
Polish companies lost on contracts designed to protect them from a strengthening zloty, when expectations of convergence with the euro reversed last year because of a slump in the economy. Regulators almost tripled their estimate of companies’ potential losses to as much as 15 billion zloty ($4.34 billion).
“There is talk of various issues” in Poland, said John Horner, a currency strategist in Sydney at Deutsche Bank AG, the world’s biggest foreign-exchange trader. “The euro is likely to remain under some pressure.”
Poland’s zloty traded at 3.5299 against the dollar from 3.5255 yesterday, and was at 4.5499 per euro from 4.5525.
To contact the reporters on this story: Ron Harui in Singapore at rharui@bloomberg.net.
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