Yen Gains as Stocks Fall on Concern Bank-Bailout Plan Will Fail

Feb. 12 (Bloomberg) -- The yen rose against the dollar and the euro as stocks declined on concern U.S. government efforts will fail to revive bank lending, boosting demand for Japan’s currency as protection against the financial-market turmoil.

The euro also fell for a third day against the yen on speculation a report today will show industrial output in the 16- nation region slid the most in almost 23 years, giving the central bank more reason to cut interest rates. The dollar weakened against the yen for a fourth day before U.S. data that economists say will show the number of Americans filing first- time jobless claims remained near a 26-year high.

“There’s a general negative tone blowing through the market,” said Paul Robson, a London-based currency strategist at Royal Bank of Scotland Group Plc. “The relief rally has been short-lived and ended with the disappointment from the recent U.S. stimulus-plan announcements.”

The yen strengthened to 89.94 per dollar as of 9:16 a.m. in London, from 90.40 in New York yesterday, when it reached 89.71, the strongest since Feb. 5. It appreciated to 115.63 per euro from 116.66. The dollar was at $1.2851 per euro from $1.2906.

The MSCI World Index dropped a third day, losing 0.8 percent, and Europe’s Dow Jones Stoxx 600 Index declined 1.6 percent. U.S. stock futures fell.

“The stock market is a barometer of risk aversion, with losses serving as a positive lead for the yen,” said Takashi Kudo, director of foreign-exchange sales in Tokyo at NTT SmartTrade Inc., a unit of Nippon Telegraph & Telephone Corp., Japan’s largest fixed-line telephone company.

Stimulus Package

U.S. Treasury Secretary Timothy Geithner, speaking yesterday before the Senate Budget Committee, defended his strategy of taking time to work out the details of a plan to shore up the financial industry.

“I completely understand the desire for details and commitments,” he said. “But we’re going to do this carefully, consult carefully, so we don’t put ourselves in the position again” where there are “quick departures and changes in strategy.”

As many as 610,000 Americans made initial applications for unemployment benefits in the week ended Feb. 8, following 626,000 the previous week, according to the median estimate of 45 economists’ forecasts in a Bloomberg News survey. The Labor Department will release the data at 8:30 a.m. in Washington.

The U.S. jobless rate climbed to 7.6 percent in January, the highest level since 1992, and payrolls fell 598,000 last month, the biggest decline since December 1974, the Labor Department said last week.

Plan to Obama

U.S. lawmakers yesterday agreed on a $789 billion economic stimulus plan, trimming the measure from more than $800 billion. Congress will send the stimulus package to President Barack Obama as early as today, Senate Majority Leader Harry Reid said yesterday.

Industrial output in the European Union may have declined 9.5 percent in December from a year earlier, the most since Bloomberg began compiling the data in January 1986, according to a separate survey of 19 economists. The region’s statistics office releases the report at 11 a.m. in Luxembourg.

The euro declined against the dollar as the European Central Bank cut its inflation outlook in 2010 to 1.6 percent from 2 percent, stoking speculation policy makers will lower its main refinancing rate to a record. The bank also reduced its 2010 growth outlook to 0.6 percent from 1.4 percent.

Rate Cut

“The report may heighten expectations for an ECB rate reduction,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “The euro is likely to weaken further” to $1.2830 and 115.90 yen today, he said.

Investors added to bets the ECB will lower borrowing costs from 2 percent at its March 5 meeting. The yield on the three- month Euribor interest rate futures contract due in March fell to 1.70 percent today from 1.715 percent yesterday.

ECB council member Erkki Liikanen said policy makers may cut the rate at their March meeting, Helsinki-based financial news Web site Taloussanomat.fi reported.

“Inflation developments and expectations are in line with our price stability target,” Liikanen said. “This gives us room to continue to take measures and it’s possible we’ll move in the next meeting.”

The Group of Seven industrialized nations will meet this weekend in Rome to discuss measures to stabilize the financial system, with finance ministers and central bankers likely to seek assurances the global recession won’t spark a wave of protectionism that deepens the slump, according to Marco Annunziata, chief economist at UniCredit MIB in London.

The G-7 may reinstate a call for China to increase the flexibility of its currency, Makoto Utsumi, a former top currency official at Japan’s Finance Ministry, said last week. “The yuan may be singled out,” he said.