Yen Falls as Carmaker Loans Revive Confidence in Carry Trades

Dec. 22 (Bloomberg) -- The yen fell on speculation $13.4 billion in emergency government loans to General Motors Corp. and Chrysler LLC will give investors confidence to add to holdings of higher-yielding assets financed in Japan.

The currency also declined against the euro on the prospect that Bank of Japan Governor Masaaki Shirakawa will say in a speech today that the yen’s 25 percent gain against the dollar this year is harming Japanese exports. The dollar also weakened against the euro before data this week that may show U.S. consumer spending, home sales and durable goods orders fell as the recession deepened.

“GM and Chrysler have won a reprieve for the remainder of this year,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “This is pushing the yen a little bit lower.”

The yen declined to 89.77 against the dollar at 9:30 a.m. in Tokyo from 89.31 late in New York on Dec. 19. It also dropped to 125.76 per euro from 124.22. The euro was quoted at $1.4016 from $1.3912. The dollar slid to an 11-week low of $1.4719 on Dec. 18.

Against the greenback, the Australian dollar rose 0.2 percent to 68.24 U.S. cents and the New Zealand dollar climbed 0.7 percent to 57.84 cents from late in New York. The British pound advanced 0.4 percent to $1.4976.

Interest Rates

Japan’s benchmark interest rate is 0.1 percent, which compares with 2.5 percent in the 15-nation euro region, 4.25 percent in Australia and 5 percent in New Zealand.

In a carry trade, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the borrowing and lending rate. The risk is that currency market moves erase those profits.

Another $4 billion will be available to GM in February provided Congress releases the second half of the $700 billion Troubled Asset Relief Program fund originally set up to bail out financial institutions.

The automakers have until March 31 to meet conditions on the loans, including demonstrating they have a plan to become profitable, or be forced to repay them. GM, the biggest U.S. automaker, and No. 3 Chrysler have said they would run out of money as soon as this month if they didn’t receive the funds.