By Yasuhiko Seki and Ron Harui
March 23 (Bloomberg) -- The yen and the dollar fell, with Japan’s currency touching a five-month low against the euro, on speculation new U.S. government steps to help banks deal with toxic assets will boost demand for higher-yielding currencies.
The dollar extended last week’s biggest decline since the 1985 Plaza Accord on speculation U.S. yields will drop following the Federal Reserve’s plan to buy Treasuries. South Korea’s won and Australia’s dollar surged against the yen as a government survey showed confidence among Japanese manufacturers fell the most on record this quarter, diminishing the currency’s allure as a shelter from the financial crisis.
“The so-called bad bank plan, aimed at removing bad loans from private banks, may improve prospects for riskier assets, including stocks and higher-yielding currencies,” said Yasuhide Yajima, senior economist at NLI Research Institute Ltd., a unit of Japan’s second-largest life insurer. The improved outlook for riskier assets “should reduce demand for safe-haven currencies,” he said.
The yen dropped to 131.30 per euro as of 11 a.m. in Tokyo from 130.29 on March 20. It touched 131.36, the lowest since Oct. 22. Japan’s currency eased to 96.22 per dollar from 95.94.
The dollar weakened to $1.3649 per euro from $1.3582 late in New York on March 20. The U.S. currency reached $1.3738 on March 19, the lowest level since Jan. 9.
The Obama administration outlines today regulatory changes aimed at avoiding a repeat of the financial crisis that’s crippled the U.S. banking system.
U.S. Treasury Secretary Timothy Geithner intends to expand the Federal Reserve’s $1 trillion Term Asset-Backed Securities Loan Facility to buy frozen assets, according to unidentified people familiar with the proposal.
Political Turmoil
Japan’s currency fell against the euro for a second day after the Asahi newspaper reported today that prosecutors will tomorrow indict an aide to Ichiro Ozawa, leader of the opposition Democratic Party of Japan, signaling further turmoil.
The yen dropped against all of the 16 most-traded after a survey by the Cabinet Office and Finance Ministry showed today that sentiment among large manufacturers was minus 66.0 points this quarter compared with minus 44.5 points three months earlier. A negative number means pessimists outnumber optimists. The government began compiling the report in 2004.
“Japan’s fundamentals including its economy are still deteriorating, casting doubt over the appeal of its currency,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “The trend for the yen is to weaken” to 131.05 per euro and 96.25 against the dollar today, he said.
Takanori Okubo, arrested March 3 on suspicion of falsely reporting donations, will be indicted by prosecutors for campaign funding violations, Asahi reported, without saying where it obtained the information.
Dollar Index
The ICE’s trade-weighted Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, fell 0.4 percent to 83.5. It dropped 4.1 percent last week, the biggest decrease since September 1985, when the U.S., U.K., France, Japan and West Germany agreed at New York’s Plaza Hotel to coordinate the devaluation of the dollar against the yen and the deutsche mark.
The Fed unexpectedly announced on March 18 that it will buy as much as $300 billion of Treasuries and increase purchases of agency mortgage-backed securities, to lower consumer borrowing costs, sparking speculation that dollar-denominated assets will lose yield advantage.
Yields Dropping
The yield on the benchmark 10-year Treasury note dropped 0.26 percentage point last week in its biggest decrease since December. The difference in yield between 10-year debt in the U.S. and Japan narrowed to 122 basis points on March 18, the least in almost two months, down from 173 basis points on Feb. 27. It widened to 136.4 basis points today.
Foreigners hold about half of marketable Treasury debt outstanding. China, the biggest foreign holder, with $740 billion, is “worried” about its investment in Treasuries and wants assurances its money is safe, Premier Wen Jiabao said at a press briefing in Beijing two weeks ago.
Demand for the euro also increased after European Central Bank President Jean-Claude Trichet said in an interview with the Wall Street Journal that zero interest rates have “drawbacks” and would not be “appropriate.”
“The ECB is most reluctant to lowering interest rates,” said Yuji Saito,” Tokyo-based head of the foreign-exchange group at Societe Generale SA, France’s third-largest bank. This, combined by an additional support measure for eastern Europe, “should support the euro,” he said.
ECB council member Axel Weber also dismissed speculation the crisis might prompt a euro-region government to default.
Asian Currencies
“All this talk of euro-area sovereigns being in a long- term problem with fiscal budgets is just a lot of nonsense,” Weber told a German Marshall Fund conference in Brussels yesterday. “There is no sustainability problem whatsoever, it’s a pricing issue.”
South Korea’s won was the strongest among the 16 most-traded currencies against the U.S. dollar. The won gained 1.3 percent to 1,394.50 per dollar, according to Seoul Money Brokerage Services Ltd. It reached 1,373.50 on March 19, the highest since Feb. 9. Korea’s currency advanced 1.3 percent to 14.535 against the yen.
The currency strengthened 10 percent this month against the greenback, the best performance among Asia’s 10 most-traded currencies outside Japan, on speculation a widening current- account surplus will ease a shortage of dollars needed to pay overseas debt.
Goldman Sachs Group Inc. today revised up its forecast for Korea’s current-account surplus in the first half of 2009 to $11 billion, from $7 billion, and reiterated its forecast that the won will gain 7.3 percent to 1,300 versus the U.S. currency within 12 months.
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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