Yen Near 5-Month Low Versus Euro as Stocks Surge on Bank Plan

March 24 (Bloomberg) -- The yen traded near a five-month low against the euro and the dollar was close to the weakest in two months versus the 16-nation currency, on bets U.S. plans to help banks dispose of toxic assets will reduce demand for safety.

The euro may extend its advance against the greenback after Treasury Secretary Timothy Geithner unveiled proposals to remove bad debt from the books of banks to spur them to resume lending. Asian currencies may extend gains on speculation the region’s stocks will advance as concerns ease about global financial turmoil, enhancing demand for higher-yielding assets.

“Active policy steps by the U.S. government tentatively weaken demand for ‘safe’ currencies,” said Akira Takei, who helps oversee the equivalent of $42.5 billion as head of non-yen bonds at Mizuho Asset Management Co., a unit of Japan’s second- largest bank. “In return, capital inflow into the currencies of emerging markets is rising.”

The yen traded at 132.17 per euro at 8:06 a.m. in Tokyo, unchanged from late yesterday in New York. It touched 132.57, the weakest level since Oct. 21. The yen was at 96.98 per dollar from 96.95. The dollar traded at $1.3634 against the euro from $1.3633. The greenback reached $1.3738 on March 19, the weakest level since Jan. 9.

The U.S. currency fell 0.5 percent yesterday against the Dollar Index, which the ICE uses to track the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, after plunging last week when the Federal Reserve said it would start buying Treasuries.

The Dollar Index, dropped 4.1 percent last week, the biggest decrease since September 1985. That’s when the U.S., U.K., France, Japan and West Germany agreed at New York’s Plaza Hotel to coordinate the dollar’s devaluation versus the yen and deutsche mark. The gauge for the greenback has fallen 5.1 percent in March, paring its gain this quarter to 2.7 percent.

Fed’s Bond Buying

The U.S. currency slid almost 5 percent versus the euro last week, its biggest decline since mid-December, after the Fed unexpectedly announced on March 18 that it would buy as much as $300 billion of Treasuries and increase purchases of agency mortgage-backed securities to lower consumer borrowing costs, a policy known as quantitative easing.

Dollar May Rebound

Gains in the euro may be tempered by speculation the dollar’s decline has gone too far. The 14-day relative strength index on the 16-nation currency versus the greenback, a gauge used by traders and analysts to project trends, rose yesterday to 71.6, near the highest level in three months. A level above 70 tends to signal a currency’s gain is too fast to sustain.

“Bottom line, I’m bullish on the dollar,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York. “Our fiscal and monetary policy is more aggressive.”

The U.S. currency will strengthen to $1.29 per euro by the end of the second quarter, Chandler forecasts.

The Standard & Poor’s 500 Index advanced 7.1 percent yesterday, the most since Oct. 28, on the Treasury’s plan to finance as much as $1 trillion in purchases of distressed assets.

Demand for the euro may rise on speculation that European Central Bank President Jean-Claude Trichet will reiterate his reluctance to lower interest rates when he speaks today in Mexico City.

The ECB president said zero interest rates have “drawbacks” and would not be appropriate, in an interview with the Wall Street Journal published this week. The ECB cut the main refinancing rate to a record low of 1.5 percent on March 5 to stem the worst recession since World War II.