Yen Climbs as Obama Bank Plan, China Outlook Deter Risk Demand

Jan. 23 (Bloomberg) -- The yen rallied against all of its major counterparts for a second week as President Barack Obama’s proposal to rein in banks and China’s possible increase in interest rates discouraged demand for higher-yielding assets.

The dollar fell to a one-month low against the yen before next week’s Federal Reserve meeting on speculation the White House’s plan to curtail risk will reduce investment in the U.S. The euro posted its biggest drop in five weeks against the dollar on concern Greece will struggle to contain its budget deficit within the European Union’s limits.

“The Obama bank risk-taking measures place a dark cloud over the U.S. recovery, which makes the environment quite dollar-negative, and the yen rallies,” said David Tien, a money manager in New York at Fischer Francis Trees & Watts, which manages $19 billion in assets. “The China news was certainly alarming.”

The dollar declined 1.1 percent to 89.82 yen this week, from 90.77 on Jan. 15, and touched 89.79 yesterday, the lowest since Dec. 18. The euro fell 1.7 percent to $1.4139, from $1.4387, after reaching $1.4029 this week, the lowest level since July 30. The euro slid 2.8 percent to 126.98 yen, from 130.61.

Obama called on Jan. 21 for limiting the size and trading activities of financial institutions as a way to reduce risk taking and prevent another global crisis. The proposals would be part of an overhaul of regulations prohibiting banks from proprietary trading or investing in hedge funds.

Drop in Stocks

The Standard & Poor’s 500 Index fell for a second straight week, losing 3.9 percent and wiping out its gain for 2010.

“Equity markets hold the key right now,” said George Davis, chief technical analyst at Royal Bank of Canada in Toronto. “If traders see the equity markets bounce back a little bit, they’ll have some confidence in buying the U.S. dollar.”

Fed policy makers will hold the target lending rate at zero to 0.25 percent at their Jan. 26-27 policy meeting, according to all of the 91 economists in a Bloomberg News survey.

Futures on the CME Group exchange showed an 18 percent chance the central bank will lift its benchmark by at least a quarter-percentage point by its June meeting, compared with 26 odds a week ago.

The dollar rose to a one-week high against the yen on Dec. 16, when the Fed said deterioration in the labor market is “abating” while reiterating it will keep its target rate at virtually zero for an “extended period.”

New Zealand Dollar

New Zealand’s dollar dropped 4.9 percent to 63.75 yen and South African’s rand decreased 4.1 percent to 11.76 yen this week on speculation Obama’s plan and China’s outlook will spur investors to reduce carry trades, in which they buy riskier assets with amounts borrowed in nations with low interest rates.

China’s inflation accelerated to a more-than-forecast 1.9 percent in December and the economy grew 10.7 percent, the National Bureau of Statistics said in Beijing this week.

The People’s Bank of China will raise interest rates by the end of June and also ratchet up banks’ reserve requirements, according to the median of 17 forecasts in a Bloomberg News survey. A survey on Jan. 8 indicated the bank would wait until the third quarter before lifting borrowing costs.

Some of China’s banks were asked to reduce lending after a record 9.59 trillion yuan ($1.4 trillion) in new loans were made last year, the nation’s chief banking regulator, Liu Mingkang, said in an interview this week.

Bank of Japan

The yen tends to rise during times of economic uncertainty because Japan’s trade surplus makes it less reliant on foreign capital. The Bank of Japan will hold its target lending rate at 0.1 percent at its meeting on Jan. 25-26, according to all of the 17 economists in a Bloomberg News survey.

The euro weakened against the dollar after European finance ministers said on Jan. 19 the crisis in Greece is affecting other nations and Moody’s Investors Service said the success of the government’s budget plan “cannot be taken for granted.” The International Monetary Fund said on Jan. 20 that Portugal should begin reining in its deficit this year.

Greece faces pressure from other European Union governments to tackle the crisis caused by a budget deficit more than four times the EU limit of 3 percent of gross domestic product.

Sterling posted its biggest weekly drop against the dollar since the five-day period ended Dec. 25, falling 0.9 percent to $1.6114. The Office for National Statistics said the U.K.’s December retail sales by volume rose 0.3 percent, less than the median forecast of a 1.1 percent gain in a Bloomberg News survey of 27 economists.

UniCredit SpA, the fourth-best forecaster on the pound versus the dollar last year, cut its 2010 prediction, citing the U.K.’s deteriorating growth prospects.

“We lowered our target based on expectations the recovery in U.K. economic activity will remain very moderate at least for most of the first half,” Roberto Mialich, a senior global- currency strategist in Milan, said via e-mail this week.