By Lukanyo Mnyanda and Yoshiaki Nohara
Jan. 25 (Bloomberg) -- The yen fell against the dollar and the euro amid speculation Bank of Japan policy makers are prepared to increase purchases of government debt to safeguard the recovery and limit the currency’s strength.
Japan’s currency snapped seven days of gains against the euro after people with knowledge of the matter said the central bank may also expand an emergency-loan program for banks. The yen and the dollar dropped on speculation Federal Reserve Chairman Ben S. Bernanke will win lawmakers’ support for a second term, boosting demand for higher-yielding assets. The dollar also declined before a report that may show sales of existing U.S. homes dropped last month.
“There’s still this whole debate about whether Japan will accept a strong yen and I think it won’t,” said Sonja Marten, a currency strategist at DZ Bank AG in Frankfurt. “They will intervene if they feel the yen starts to accelerate too much.”
The yen depreciated to 127.96 per euro as of 7:03 a.m. in New York, from 126.98 last week. It weakened to 90.27 per dollar, from 89.82. It traded at 89.79 on Jan. 22, its strongest level since Dec. 18. The dollar declined to $1.4174 per euro from $1.4139, after appreciating to $1.4029 on Jan. 21, its highest level since July.
Bernanke’s Support
President Barack Obama “is very confident” Bernanke will be confirmed, David Axelrod, a senior White House adviser, said on CNN’s “State of the Union” program. Senate Republican leader Mitch McConnell said on NBC’s “Meet the Press” that Bernanke will have “bipartisan support in the Senate.”
Mounting opposition to Bernanke’s reappointment from senators including John McCain and Russ Feingold helped push U.S. stocks lower last week on concern that uncertainty at the Federal Reserve may risk prospects for an economic recovery. Investors may opt to sell borrowed yen to fund purchases of riskier assets when the economic outlook improves.
Japan’s central bank will leave interest rates and its lending program unchanged tomorrow, according to 16 of 17 economists in a Bloomberg survey. How the Bank of Japan responds in coming months will depend on the extent of any further economic shocks, such as a surge in the yen to November’s 14- year high, said the people familiar with the central bank’s plans, who spoke on condition of anonymity.
“If deflation pressures continue to build, there’s going to be more political pressure on them to act,” driving the yen’s move than the Bernanke speculation, said Derek Halpenny, European head of global currency research at Bank of Tokyo- Mitsubishi UFJ Ltd.
High-Yielders
The dollar weakened most against the South African rand and Mexican peso. The National Association of Realtors may say today that U.S. existing home sales dropped to a 5.9 million annual rate in December from 6.54 million in November, according to the median estimate of economists in a Bloomberg survey.
Fed officials will do their part to spur growth by keeping interest rates near zero after their two-day meeting this week, economists forecast in a Bloomberg survey. Policy makers, who meet Jan. 26-27, may reiterate their pledge to hold rates “exceptionally low” for “an extended period.”
Futures trading in Chicago on Jan. 22 showed an 19 percent chance that the Fed will raise its target rate for overnight bank loans by at least a quarter-percentage point by its June meeting, down from 26 percent odds a week earlier.
Interest Rates
Benchmark interest rates of as low as zero in the U.S. and 0.1 percent in Japan compare with 3.75 percent in Australia and 2.5 percent in New Zealand, making the South Pacific nations’ assets attractive to investors seeking higher returns. The risk in such trades is that currency market moves will erase profits.
Australia’s dollar rose to 90.64 U.S. cents from 90.07 cents, and gained to 81.80 yen from 80.91 yen. New Zealand’s currency climbed to 71.41 cents from 70.97 cents, and advanced to 64.45 yen from 63.75 yen.
U.S. stock-index futures gained, indicating that the Standard & Poor’s 500 Index will rebound from its biggest three- day decline since the rally that began in March. Futures on the S&P 500 expiring in March advanced 0.8 percent.
Gains in the euro were tempered on speculation that Greece will struggle to contain its budget deficit, reducing the allure of assets in the 16-nation region. Greece may sell at least 5 billion euros ($7.1 billion) of five-year debt this week, according to a person familiar with the matter.
‘Drag on Euro’
European Central Bank President Jean-Claude Trichet said in an interview published last week with Germany’s Focus magazine that Greece, whose deficit has expanded to almost 13 percent of gross domestic product, hasn’t respected the Stability and Growth Pact, which requires members to limit budget shortfalls to 3 percent of GDP.
“Signs of an additional increase in the Greek risk premium would likely remain a drag on the euro,” Thomas Stolper, a London-based economist at Goldman Sachs Group Inc., wrote in an e-mail to Bloomberg. “There also remains the risk that other countries come under more fiscal pressures as well.”
The British pound gained 0.2 percent to $1.6147 and was little changed at 87.79 pence per euro.
The U.K. currency may be the loser no matter who prevails in this year’s election between Prime Minister Gordon Brown and opposition leader David Cameron, because the next government may not have enough support in parliament to rein in the Group of 20’s biggest budget deficit. Strategists cut forecasts on sterling versus the dollar by as much as 2 percent this month to the lowest since June, forecasts compiled by Bloomberg.
To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net
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