By Matthew Brown and Ron Harui
Feb. 23 (Bloomberg) -- The yen fell against the euro and the dollar on speculation the U.S. government will increase its stakes in domestic banks to shore up the financial system, damping demand for the Japanese currency as a refuge.
The yen dropped most against the pound as stocks rose and Treasuries fell after the Wall Street Journal cited unidentified people as saying the U.S. may raise its holding in Citigroup Inc. The pound gained for a third day against the dollar after a person familiar with the matter said Royal Bank of Scotland Group Plc plans to cut costs by more than 1 billion pounds ($1.44 billion).
“Medium term, we’re likely to see trends re-establishing themselves” for the yen and the dollar, said Ian Stannard, a foreign-exchange strategist in London at BNP Paribas SA, France’s largest bank.
The yen weakened 1.5 percent to 121.45 per euro as of 10:50 a.m. in London from 119.68 in New York at the end of last week. The dollar strengthened to 94.79 yen, from 93.35. The euro was little changed at $1.2818, from $1.2826.
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 Wall Street Journal said.
Stocks rose, with the MSCI World Index gaining 0.7 percent and the Dow Jones Stoxx 600 adding 0.9 percent. Futures on the U.S. Standard & Poor’s 500 Index rallied 1.3 percent.
Bank Takeovers
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, tumbled as much as 36 percent on Feb. 20 on concern the U.S. may take over the banks. The Obama administration said in response 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, rose 0.2 percent to 86.659. The U.S. currency weakened to $1.4613 per pound, from $1.4433. It was at 1.1633 Swiss francs, from 1.1560.
The euro erased gains against the dollar after European Central Bank President Jean-Claude Trichet said credit flows in the euro region are starting to decline. The financial system remains under “severe strain,” which is hampering an economic recovery, Trichet said in a speech to European securities regulators in Paris today.
Euro Versus Pound
Europe’s single currency traded at 87.75 British pence, from 88.91 pence. It was at 1.4912 Swiss francs from 1.4820.
Citing problems recapitalizing banks in central and eastern Europe, U.K. Prime Minister Gordon Brown said yesterday the European Group of 20 leaders proposed the creation of a $500 billion fund to help increase the International Monetary Fund’s resources for crisis management.
Europe’s single currency rose 3.3 percent versus the greenback since touching a three-month low of $1.2513 on Feb. 18, as concern surrounding European banking losses eased amid international efforts to address the problems.
Trichet said on Feb. 20 it’s a mistake to say the euro region has any weak links and rejected concern about fragility in the Irish economy.
Stay Dollar ‘Positive’
Investors should “maintain a positive outlook” on the dollar over the next three months and sell the euro against the U.S. currency, Ashley Davies, a foreign-exchange strategist at UBS AG in Singapore, wrote in a note to clients today. ING Groep NV is “positive on the dollar for the next couple of years,” currency strategist Tom Levinson said in a Bloomberg Television interview today.
If U.S. President Barack Obama achieves his goal of halving the deficit by the end of his first term in office, that will eliminate “one of the reasons people are negative on the dollar in the very long term,” Levinson said.
The yen fell to a five-week low against the euro before a government report this week that economists say will show Japan posted a trade deficit for a 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 120.85 per euro today, he said.
The Finance Ministry’s custom-cleared trade balance statistics on Feb. 25 may show Japan posted a trade deficit of 1.18 trillion yen in January, according to a Bloomberg News survey of 26 economists.
Yen’s Worst Month
The yen is heading for its worst month against the dollar since April after government reports showed Japan is sinking deeper into recession, with fourth-quarter gross domestic product contracting at an annual rate of 12.7 percent, the most since the 1974 oil shock.
Since January, the correlation between the yen and the cost of protecting against a default on Japanese government bonds swung to negative 43 percent, showing investor concerns are increasing. The yen and cost of credit-default swaps moved in tandem 88 percent of the time last year.
“We wouldn’t really have looked at sovereign credit-default swaps in any great detail before” the September bankruptcy of Lehman Brothers Holdings Inc. caused credit markets to freeze, said Lee Hardman, a strategist at Bank of Tokyo-Mitsuishi UFJ Ltd. in London. “It’s an area which potentially is going to see increasing focus as a driver of currency rates.”
To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net
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