Yen Declines as U.S. Pledge on Banks Reduces Demand for Haven

Feb. 23 (Bloomberg) -- The yen fell to the lowest level against the dollar since December and dropped versus the other major currencies as U.S. financial regulators pledged to inject more funds into banks, reducing demand for a haven.

The currency may extend its decline as credit-default swaps gauging Japanese government bond risk surge. The pound gained for a third day against the dollar as a person familiar with the matter said Royal Bank of Scotland Group Plc plans to cut costs by more than 1 billion pounds ($1.44 billion).

“There is an improvement in risk appetite today, and that’s filtered though in terms of dollar strength versus the yen,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. “The yen is weaker off the back of improved sentiment on banking stocks and the potential for some government involvement.”

The dollar rose 1.2 percent to 94.49 yen at 4:09 p.m. in New York, from 93.35 on Feb. 20, and traded as high as 94.95, the strongest level since Dec. 1. The euro increased 0.3 percent to 120.04 yen from 119.68, touching 121.93, the highest level since Jan. 19. The euro fell 1 percent to $1.2702 from $1.2826 at the end of last week.

The Polish zloty, Hungarian forint and Czech koruna rallied against the euro after eastern European central banks pledged to coordinate support for their currencies. The zloty gained as much as 4 percent to 4.5636 per euro, the biggest intraday advance in almost four months, after Polish central bank governor Slawomir Skrzypek said “an intensification of information exchange and coordination of action” will help regional central banks support their currencies.

Forint’s Advance

The forint climbed 1.9 percent to 298.25 per euro, and the koruna increased 1.2 percent to 28.49.

The three currencies tumbled last week as Moody’s Investors Service said ratings of banks with subsidiaries in eastern Europe may be cut as economies in the region deteriorate.

The yen fell 1.7 percent to 9.38 versus South Africa’s rand and 1.4 percent to 136.63 against the pound after the U.S. Treasury and other regulators said in a joint statement in Washington today that the government “stands firmly behind the banking system during this period of financial strain,” encouraging Japanese investors to halt repatriation of assets.

U.S. financial regulators will begin examinations this week to determine if banks have enough capital, according to the statement. Citigroup Inc. and Bank of America Corp. jumped on the announcement even as the Standard & Poor’s 500 Index closed at its lowest level in 12 years.

‘Yen Selling’

“Yen selling is the main theme,” said Hidetoshi Yanagihara, senior currency trader at Mizuho Corporate Bank in New York. “The market is buying back bank stocks.”

Yanagihara said some investors also sold the yen in the wake of the resignation of Japanese Finance Minister Shoichi Nakagawa, who quit last week after slurring his words and nodding off during a Feb. 14 press conference at the Group of Seven meeting in Rome.

“After the resignation of the finance minister, things are still in chaos,” Yanagihara said. “That’s absolutely putting pressure on the yen.”

Japan’s currency was headed for a 4.9 percent drop versus the dollar in February, its worst month since April 2004. A government report showed Japan is sinking deeper into recession, with fourth-quarter gross domestic product contracting at an annual rate of 12.7 percent, the most since the 1974 oil shock.

The cost of protecting Japanese government bonds more than doubled to 1.21 percent of the face value on Feb. 17, from 0.49 percent on Jan. 30, according to CMA Datavision.

Investor Concern

Since January, the correlation between the yen and the cost of protecting against a default on Japanese bonds swung to negative 43 percent, showing investor concerns are increasing. The yen and cost of credit-default swaps moved in tandem 88 percent of the time last year.

Traders are starting to use the speculative contracts blamed for fueling Wall Street’s meltdown last year to measure currency strength.

The difference in yield between two-year Treasury notes and Japanese securities with comparable maturity was 0.57 percentage point today, compared with 0.38 percentage point on Jan. 1, making the U.S. assets more attractive.

“The dollar-yen seems to be following the yield spread,” said Paresh Upadhyaya, who helps manage $50 billion in currency assets as a senior vice president at Putnam Investments LLC in Boston. “The recent yen weakness isn’t the start of a new trend. The yen is likely to strengthen in the second quarter because of continued uncertainty and risk aversion.”

Sterling rose as much as 1.6 percent to $1.4662, the highest level since Feb. 10, after a person familiar with the situation said RBS will segregate toxic assets in a new unit as it prepares for a government insurance program to be announced this week. The pound gained 1.2 percent to 87.80 pence per euro.

The euro erased gains against the dollar after European Central Bank President Jean-Claude Trichet said in a speech to European securities regulators in Paris today that credit flows in the euro region are starting to decline.