Yen Weakens as Government Steps to Aid Banks Spurs Yield Demand

Jan. 19 (Bloomberg) -- The yen fell to a one-week low against the euro and declined versus the dollar on speculation government efforts to rescue ailing banks will revive global credit markets.

Japan’s currency weakened for a third day against Australia’s dollar as investors bet U.S. President-elect Barack Obama will step up efforts to recapitalize U.S. banks, boosting demand for higher-yielding assets funded in yen. The pound gained after U.K. Prime Minister Gordon Brown said the government will today announce a package of measures to encourage bank lending.

“Hopes over the Obama administration are improving risk- taking appetite,” said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France’s second-largest bank by market value. “The yen is being sold.”

The yen declined to 121.25 per euro as of 6:12 a.m. in London from 120.37 late in New York on Jan. 16. It reached 122.17, the lowest level since Jan. 9. Japan’s currency fell to 90.85 against the dollar from 90.72 at the end of last week. It touched 91.30, also the lowest since Jan. 9.

The euro advanced to $1.3346 from $1.3267 on Jan. 16 and the British pound climbed to $1.4839 from $1.4733. The Swiss franc strengthened to 1.1176 from 1.1197. Currency markets may be more subdued than usual today because U.S. financial markets are shut for a public holiday, Saito said.

The MSCI Asia-Pacific Index of regional shares gained for a second day, advancing 0.3 percent. Implied volatility on one- month dollar-yen options fell to 18.44 percent from 18.92 percent on Jan. 16, indicating a declining risk of exchange-rate fluctuations that can erode profit on so-called carry trades.

‘Aggregator’ Bank

The yen declined against 14 of the 16 most-active currencies as Obama’s team say they will use part of the $350 billion remaining from the Troubled Asset Relief Program to help stem foreclosures, according to people familiar with the matter.

Japan’s currency weakened the most against Norway’s krone, New Zealand’s dollar and Australia’s dollar as U.S. policy makers signaled the government will create a government-backed “bad” or “aggregator” bank to acquire hundreds of billions of dollars of troubled securities held by lenders.

“A lot of work has been done on an aggregator bank” and other ways of using the $700 billion financial-rescue fund “to let it go further when it comes to dealing with illiquid assets,” Treasury Secretary Henry Paulson told reporters on Jan. 16 in Washington.

The yen slid 1.1 percent to 13.2211 versus the krone, 1.3 percent to 50.21 against New Zealand’s dollar and 1.3 percent to 61.83 versus Australia’s dollar from late in New York on Jan. 16.

New Packages

“We’re going to see Obama coming out with some new stimulus-type packages and a lot of measures to support the economy in the U.S.,” Jim Vrondas, Sydney-based manager of corporate business at online foreign-exchange dealer OzForex Ltd., said in an interview with Bloomberg Television. “Risk appetite at the moment is looking pretty good. In the short term, the yen is going to remain a little bit weak.”

Benchmark interest rates are 3 percent in Norway, 2 percent in Sweden and 5 percent in New Zealand, compared with 0.1 percent in Japan, encouraging investors to borrow in yen and buy higher-yielding assets elsewhere.

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

Eisuke Sakakibara, a former official at Japan’s finance minister, said the ministry may intervene to support the U.S. currency if it weakens beyond 85 yen, CNBC reported today.

Credit Losses

Losses in the yen may be tempered on speculation more than $1 trillion of asset writedowns worldwide and rising credit losses will hurt corporate earnings and deter investors from buying riskier assets.

U.S. companies reporting results this week after the Martin Luther King Day holiday today include International Business Machines Corp., Johnson & Johnson, United Technologies Corp., Microsoft Corp. and General Electric Co. Bank of America Corp. posted a fourth-quarter loss of $1.79 billion on Jan. 16, its first since 1991.

“A lot of firms will release results this week and their fourth-quarter earnings will likely be bad,” said Masashi Kurabe, head of currency sales and trading in Hong Kong at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan’s largest publicly traded bank by assets. “These worries are probably causing the yen to recover.”

The pound gained for a fourth day against the yen and the dollar as the U.K. government’s measures are aimed at “getting lending moving in the economy” and will include banks declaring bad debts and losses, Prime Minister Brown said yesterday during a trip to Egypt.

“There’s some optimism about the U.K. government’s plan,” said Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore. “This is positive for the pound,” which may rise to 137 yen and $1.50 today, he said.

The government is also due to unveil plans to guarantee lending for households and companies, Brown said.