Yen Declines Against Dollar, Euro as Asian Stocks Trim Losses

By Yasuhiko Seki and Ron Harui

May 28 (Bloomberg) -- The yen fell toward a two-week low against the euro and weakened versus the dollar as Asian stocks trimmed losses, reviving demand for higher-yielding assets.

The yen also declined versus all of the 16 most-active currencies after Japanese government data showed local investors boosted purchases of overseas bonds to the highest level in a month. The Australian dollar rose toward a seven-month high against the U.S. currency on optimism the global recession will ease, reviving demand for the South Pacific nation’s assets.

“Equity markets of emerging economies, including Asia, are holding a relatively firm undertone, which means risk appetite is still reasonably strong,” said Akira Takeuchi, a Tokyo-based currency dealer at Chuo Mitsui Trust & Banking Co., a unit of Japan’s seventh-largest banking group. “The yen will be sold against higher-yielding currencies.”

The yen weakened to 132.74 per euro as of 11:10 a.m. in Tokyo from 131.83 in New York yesterday, when it touched 133.52, the lowest level since May 12. The yen dropped to 95.85 per dollar from 95.34. The dollar traded at $1.3850 against the euro from $1.3825.

Australia’s currency gained 0.5 percent to 77.95 U.S. cents and advanced 1.2 percent to 74.84 yen. New Zealand’s dollar strengthened 0.4 percent to 58.81 yen.

The New Zealand dollar is the best performer against the yen this month, gaining 6.1 percent. The nation’s 10-year government bonds offer 4.43 percentage points more yield than similar-maturity Japanese debt.

‘Betting on the Optimism’

The yen weakened as the Nikkei 225 Stock Average erased losses to be little changed after falling as much as 0.9 percent.

“It seems Japanese investors are betting on the optimism that the global economy has bottomed out and are willing to spend more on assets of emerging markets,” said Shoichi Handa, a senior dealer in Tokyo at SBI Liquidity Markets Co., a unit of financier SBI Holdings Inc. “Since the Australian economy benefits significantly from a recovery of global demand, the Australian dollar may reach 80 yen.”

Benchmark interest rates are 3 percent in Australia and 2.5 percent in New Zealand, compared with 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency market moves will erase profits.

‘Problem’ Banks

Demand for the relative safety of the yen and the dollar may increase after the Federal Deposit Insurance Corp. said yesterday the number of “problem” banks grew to a 15-year high, reviving concern about the health of the U.S. banking system.

The FDIC classified 305 banks as “problem” and the total assets involved rose 38 percent to $220 billion, the highest since 1993, the agency said, without identifying any of the lenders. The FDIC said its insurance fund slumped 25 percent to the lowest level in 15 years.

The cost of borrowing dollars for three months between banks rose for a second day yesterday after ending a 38-day decline amid renewed concern some financial institutions aren’t strong enough to weather the financial turmoil. The London interbank offered rate, or Libor, for three-month loans increased one basis point to 0.674 percent.

To contact the reporters on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.