Yen Falls on Speculation Banks Need Less Capital Than Forecast

By Theresa Barraclough and Ron Harui

May 7 (Bloomberg) -- The yen weakened against the dollar and the euro on speculation U.S. banks need less new capital than was projected, sapping demand for Japan’s currency as a refuge from the global financial crisis.

Japan’s yen fell against 15 of the 16 major currencies after Treasury Secretary Timothy Geithner said none of the 19 banks that underwent stress tests are insolvent, spurring gains in stocks on optimism investors will buy higher-yielding assets. The euro slid versus the greenback on concern European Central Bank policy makers may decide to buy debt to stimulate growth. Australia’s dollar climbed to a seven-month high against the yen after the nation’s employers unexpectedly added workers in April.

“The results of the stress tests don’t look as bad as the markets had feared, so the pessimistic mood is likely to ease,” said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France’s third-largest bank. “Such improvement in risk appetite will probably be a yen-negative.”

The yen weakened to 98.68 per dollar at 11:18 a.m. in Tokyo, from 98.31 yesterday in New York. The currency fell to 131.31 per euro from 131.10 yesterday. Europe’s single-currency weakened to $1.3307 from $1.3334.

Australia’s dollar climbed 1.2 percent to 74.47 yen and advanced 0.9 percent to 75.47 U.S. cents after a government report showed the jobless rate declined for the first time since August. New Zealand’s dollar advanced to 59.01 U.S. cents from 58.37 cents after the nation’s unemployment rate climbed by less than economists estimated.

Asian stocks advanced, with the MSCI Asia Pacific Index of regional shares adding 3.3 percent and the Nikkei 225 Stock Average gaining 4.5 percent. The dollar-yen had a correlation of 0.85 with the Nikkei 225 Average in the past year, according to data compiled by Bloomberg. A value of 1 means the two move in lockstep. Japanese financial markets were closed from May 4 until today for the Golden Week holidays.

The Standard & Poor’s 500 Index rose 1.7 percent yesterday to the highest since Jan. 6.

The results of the stress tests, due out at 5 p.m. in Washington today, will show Citigroup Inc. needs only about $5 billion and JPMorgan Chase & Co. doesn’t need a deeper reserve against losses, people familiar with the matter said yesterday.

The ECB will reduce borrowing costs by a quarter-percentage point to 1 percent today, according to all economists surveyed by Bloomberg.

Drastic Measures

The financial crisis needs “drastic” measures, Athanasios Orphanides, an ECB council member, said in Nicosia on May 5. Orphanides and George Provopoulos, another member, have indicated they may support cutting the target rate to less than 1 percent and buying debt to pump money into the economy.

“Some people expect a dramatic move by the ECB, such as a big purchase of bonds,” 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. That “is why the euro is suffering.”

Europe’s single-currency may be set for a sudden slide if the ECB announces plans to buy debt at today’s policy meeting, Citigroup Inc. said. The U.S. dollar dropped after the Federal Reserve announced March 18 it would start buying Treasuries to hold down consumer borrowing costs.

“The present euro-dollar setup suggests a non-linear reaction,” Citigroup Inc. analysts led by New York-based Tom Fitzpatrick wrote in a note yesterday. “A dovish surprise looks much more likely to illicit a sharp move to the down side while an as expected outcome may have little material effect.”

Jobs Data

Australia’s dollar also gained versus the greenback on optimism the U.S. cut workers at a slower pace in April, after a report yesterday signaled the labor market may be recovering.

“Economic data helped give some support to risk appetite,” Mitul Kotecha, head of global foreign-exchange strategy at Calyon in Hong Kong wrote in a report today. The Australian and New Zealand dollars “will continue to benefit from improved carry appetite, higher commodity prices and easing risk aversion.”

In carry trades, investors get funds in a country with relatively low borrowing costs and invest in another with higher interest rates. The risk is market moves can erase those profits.

ADP Employer Services reported that U.S. companies eliminated 491,000 jobs in April, less than the 645,000 jobs forecast in a Bloomberg survey. A U.S. Labor Department report tomorrow is estimated by economists to show companies and government agencies shed 600,000 jobs last month, compared with 663,000 in March.

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