Yen Trades Near 2009 Low Versus Euro as BOJ Raises Debt Buying

By Theresa Barraclough and Ron Harui

March 18 (Bloomberg) -- The yen traded near the weakest level against the euro this year after the Bank of Japan said it will step up purchases of government debt, encouraging investors to seek higher-yielding assets overseas.

The dollar was near a one-month low against the euro as Asian stocks extended a rally in global equities, damping demand for the U.S. currency as a refuge from the financial turmoil. South Korea’s won weakened versus the dollar, snapping a three- day advance, on speculation domestic companies took advantage of its recent gains to pay import bills.

“Governments and central banks are taking various measures which are supporting sentiment that the worst of the financial crisis may be over,” said Yuji Saito, Tokyo-based head of the foreign-exchange group at Societe Generale SA, France’s third- largest bank. “People who had shunned risk are returning to the markets. This is causing selling of the dollar and the yen.”

Japan’s currency traded at 128.48 against the euro as of 3 p.m. in Tokyo, from 128.35 yesterday in New York, when it slid 0.8 percent. It earlier dropped to 128.83, the weakest since Dec. 29. The yen was at 98.51 per dollar from 98.60.

The dollar was at $1.3039 per euro from $1.3017 yesterday, when it declined 0.4 percent. The U.S. currency touched $1.3072 on March 16, the lowest level since Feb. 10. The won fell 0.6 percent to 1,417.65 per dollar, according to Seoul Money Brokerage Services Ltd. It earlier reached 1,389.90 the highest since Feb. 12.

Risk Appetite

The MSCI Asia Pacific Index of regional stocks climbed 0.9 percent after the Standard & Poor’s 500 Index rose 3.2 percent yesterday. The S&P 500 surged 11 percent last week in its biggest rally since November.

“Basically, we’ve seen a bear market rally in risk appetite and in riskier assets such as equities,” Callum Henderson, Singapore-based head of foreign-exchange at Standard Chartered Bank said in a Bloomberg Television interview. “That has taken the upside pressure off the dollar.”

The Bank of Japan said after its policy meeting ended today that it will increase the amount of government debt it will buy to 1.8 trillion yen ($18.3 billion) from 1.4 trillion yen. The BOJ has purchased the bonds since 1989 and last increased the amount in December.

“The direction is clearly up for” the euro, said Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland Group Plc in Tokyo and a former Bank of Japan currency trader. It may be that a “recovery in risk appetite, given expectations of quantitative easing from central banks, is supporting equity markets.”

The yen is heading for an 8.7 percent loss versus the dollar in the three months to March 31, the end of the nation’s fiscal year, as demand waned for the currency as a shelter from the financial crisis.

Under Pressure

“Going into the Japanese fiscal year-end, we expect the yen to remain under pressure,” analysts led by Hans-Guenter Redeker, London-based global head of foreign-exchange strategy at BNP Paribas SA, wrote in a note yesterday. “It is worth noting that we are now entering the most positive period of the year for the dollar-yen as far as seasonal factors are concerned.”

The Dollar Index declined for a seventh day, the longest losing streak in a year, on speculation the Federal Reserve will say at the end of a two-day policy meeting today that it is shifting toward more aggressive monetary expansion. The index, which the ICE uses to track the U.S. currency’s performance against the euro, yen, British pound, Canadian dollar, Swiss franc and Swedish krona, declined to 86.726 from 86.933.

Fed Chairman Ben S. Bernanke and his colleagues may signal today they will accelerate so-called quantitative easing measures, such as increasing the pace and size of purchases of mortgage securities. The board will keep its benchmark interest rate in a range of zero to 0.25 percent, according to a Bloomberg News survey.

‘Aggressive Efforts’

The yen strengthened against the dollar for the first time in five days after U.S. Treasury Secretary Timothy Geithner signaled that the “wind down” of American International Group Inc. may accelerate.

“We will continue our aggressive efforts to resolve the future status of AIG in a manner that will reduce systemic risks to our financial system,” Geithner wrote in a letter yesterday to House Speaker Nancy Pelosi, Senate Majority Leader Harry Reid and other lawmakers. “We will explore any and all ways to accelerate this wind-down process.”

Geithner has been criticized by Congress for presiding over AIG’s payment of about $165 million in bonuses and retention pay. The company received a government bailout package in September that has since grown to about $170 billion.

‘Remain Intact’

“The market has been paying attention to the recovery in the U.S., but now with AIG, uncertainty has increased,” said Susumu Kato, chief economist in Tokyo at Calyon Securities, the investment banking unit of Credit Agricole SA. “There are risks associated with the U.S. financial industry, so the risk aversion type of strategy will remain intact,” supporting the yen, he said.

The South Korean won dropped from a one-month high against the dollar as the benchmark Kospi index of local shares tempered a rally after climbing 3.4 percent yesterday, the biggest gain in almost seven weeks. The won has strengthened about 8.2 percent since the end of February as signs of an improvement in the U.S. financial industry drove a rebound in global shares.

“The won’s recent strength is spurring a bout of importers’ settlements,” said Lee Young Chul, a currency dealer with Korea Exchange Bank in Seoul. “With local stocks showing signs of faltering, demand for the currency also weakened.”

To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.