By Anchalee Worrachate and Theresa Barraclough
March 30 (Bloomberg) -- The yen and the dollar rose against the euro after a U.S. government official said bankruptcy may be the best option for General Motors Corp. and Chrysler LLC, spurring investors to buy the currencies as a refuge.
The yen climbed to the strongest level in almost two weeks versus the euro as stocks ended a five-day rally on concern the global recession will lead to further losses in the financial industry. U.S. Treasury Secretary Timothy Geithner said yesterday some financial institutions will need “large amounts” of aid. The dollar advanced for a third day versus the euro on speculation the European Central Bank will cut interest rates to the least since the currency’s introduction in 1999.
“Risk aversion is coming back with a vengeance, and that will benefit safe-haven currencies,” said Lee Hardman, a currency strategist in London at Bank of Tokyo-Mitsubishi UFJ Ltd. “There’s concern that the government will allow auto companies to go under and that the financial crisis might be far from being over.”
The yen advanced to 126.73 per euro as of 9 a.m. in London from 130.04 in New York last week. It reached 126.42 earlier, the strongest since March 16, for a two-day gain of 5 percent, the most since Nov. 12. Japan’s currency also appreciated to 96.28 per dollar from 97.86. The dollar strengthened to $1.3188 per euro from $1.3287.
The dollar, the world’s reserve currency, often strengthens in times of economic turmoil as investors seek the currency as a refuge. The yen also gains because Japan’s current-account surplus reduces the nation’s reliance on overseas lenders.
Dollar Index
The Dollar Index rose for a third day after an official in the President Barack Obama’s administration who declined to be identified said GM and Chrysler must overhaul their recovery plans with deeper concessions to justify further taxpayer cash.
GM asked for as much as $16.6 billion in additional assistance after receiving $13.4 billion since December. Chrysler requested $5 billion after getting $4 billion. Both had been asked to show progress by the end of this month in matters such as GM’s need to cut its unsecured debt by two thirds.
The Dollar Index, which the ICE uses to track the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, climbed 0.5 percent to 85.499 after reaching 85.608, the highest level since March 18.
The MSCI World Index slumped 1.7 percent as every major stock market in Europe declined. Futures on the Standard & Poor’s 500 Index dropped 2.9 percent.
‘Risk Aversion’
“The tumble in equities is sparking risk aversion among investors,” said Toshihiko Sakai, head of trading for foreign exchange and financial products in Tokyo at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan’s biggest bank. “The yen and the dollar are likely to be bought.”
The euro weakened for a second day versus the yen on expectations ECB President Jean-Claude Trichet will signal policy makers may cut rates further when he speaks before the Committee on Economic and Monetary Affairs at 4:30 p.m. in Brussels today. The currency also fell amid speculation policy makers may be forced to adopt unconventional monetary policy measures, such as printing money, as rates approach zero.
Both the Fed and the Bank of England printed money and bought assets such as corporate and government debt, a policy known as quantitative easing, to boost the economy.
The “key obstacle” to gains in the euro “is that the ECB too will adopt some form of quantitative easing,” said John Normand, head of global currency strategy in London at JPMorgan Chase & Co. “This Thursday’s ECB meeting will prove a key test given that every major central bank which met this month surprised the market the scope and scale of quantitative easing.”
G-20 Meeting
The Frankfurt-based central bank is likely to reduce the main refinancing rate to 1 percent at its meeting on April 2, according to a Bloomberg News survey of economists.
The euro also declined on speculation leaders from the Group of 20 nations, who meet on April 2 in London, will fail to agree on fiscal measures to counter the region’s slump. European officials this month said they had spent enough money to combat the crisis and don’t want to blow out their budgets.
“The euro will weaken against the U.S. dollar given that the market expects the ECB to cut interest rates this week,” said Susumu Kato, chief economist in Tokyo at Calyon, the investment-banking unit of Credit Agricole SA. “Also European leaders, except for the U.K., will not want to do much more at the G-20 meeting, so this will also be very negative for the euro.”
New Zealand Dollar
New Zealand’s dollar was headed for the best monthly advance versus the greenback since 1985 on speculation spending on commodities will increase as central banks print unprecedented amounts of cash to rescue their economies. New Zealand is the second-largest wool exporter, behind Australia, and home to Auckland-based Fonterra Cooperative Group Ltd., the world’s biggest dairy exporter.
The New Zealand dollar dropped to 56.15 U.S. cents today from 57.06 cents on March 27. The currency gained 12 percent this month, the best performance since 1985.
Nineteen of the largest developed economies are spending 43 percent of their average gross domestic product to end the worst economic crisis since the Great Depression, the International Monetary Fund said March 6, adjusting for the cost of living.
Aberdeen Asset Management, Hermes Pension Management Ltd. and Kokusai Global Sovereign Open Fund figure that new money will spur demand for everything from iron ore and oil to wool, so they’re buying Aussies, kiwis and Norwegian kroner.
Goldman on Yen
The yen is likely to fall to its lowest level against the dollar in more than five months as Japan’s recession deepens and the appeal of the currency wanes, Goldman Sachs Group Inc. said, reiterating a forecast it made on March 11.
Japan’s currency will probably weaken because of factors including the plunge in the nation’s exports and Japanese investor purchases of foreign securities, Fiona Lake, a Hong Kong-based economist at Goldman Sachs, wrote in a note today. The yen’s “fair value” versus the dollar also is 114, suggesting the currency is “overvalued,” Lake wrote.
“The macro challenges facing the yen has caused us to revise our yen forecast downward,” Lake said in an interview. “We expect dollar-yen to trade at 105 in three month’s time.”
The pound fell after Nationwide Building Society, the U.K.’s largest customer-owned lender, agreed to buy parts of Dunfermline Building Society after the government refused to rescue the Scottish lender.
Nationwide will purchase “core elements” of Dunfermline, the Bank of England said in a statement today.
The British currency weakened to $1.4181, from $1.4320 last week, and to 93.10 per euro, from 92.81.
To contact the reporters on this story: Anchalee Worrachate in London in aworrachate@bloomberg.net; Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net
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