Friday, March 5, 2010

Yen Drops on Speculation Bank of Japan Will Expand Easing

March 5 (Bloomberg) -- The yen declined against higher- yielding currencies on speculation the Bank of Japan will step up credit easing measures to stave off deflation.

The Japanese currency fell against all its 16-most active currencies after Nikkei English News said, without citing anyone, the central bank will likely discuss more monetary easing measures at its two-day meeting starting March 16. The euro is poised for a weekly drop against the dollar on receding optimism that Greece will receive an outside financial aid to fix its debt problems, hurting the confidence in the common currency.

“Given the fact that the BOJ is already running far behind other central banks in exit strategies and prospects that interest rates here will remain low, yen-carry trade may become popular again,” said Soichiro Mori, a Tokyo-based strategist at FXOnline Japan Co., a margin-trading company.

The yen fetched 89.24 per dollar as of 9:15 a.m. in Tokyo from 89.02 in New York yesterday when it touched 88.14, the strongest since Dec. 10. The euro stood at $1.3586 from $1.3581 in New York, set for a 0.3 percent decline on the week. It bought 121.26 yen from 120.91 in New York.

In carry trades, investors get funds in one currency with relatively low borrowing costs to invest at higher yields in another. The benchmark interest rate of 0.1 percent in Japan makes the yen popular for funding such transactions.

The cost of borrowing in yen for three months between banks fell below the dollar rate for the first time since August, reducing the appeal of the greenback as a funding currency for leveraged purchases of assets.

New Measures

The new measures by the Bank of Japan could focus on ways to lower short-term rates, the Nikkei said. A decision on specific measures is likely to take place in April, when two board meetings are scheduled, the newspaper said.

Brian Kim, a currency strategist in Stamford, Connecticut, at UBS AG, cited the Nikkei story in a research report yesterday, saying the brokerage maintained its three-month dollar-yen forecast at 95.

The Bank of Japan unveiled a 10 trillion yen ($112.1 billion) lending facility for commercial banks in December after the yen surged to 84.83 per dollar the previous month, the strongest since July 1995, and government ministers urged the central bank to do more to combat falling prices. A stronger yen pushes down the cost of imports, adding to deflation.

Consumer prices excluding fresh food slid 1.3 percent in January from a year earlier, matching the drop in the previous month, the statistics bureau said last month.

Greece Concerns

European Central Bank President Jean-Claude Trichet said it would not be “appropriate” for the International Monetary Fund to aid Greece.

“There is emerging doubt Greece can get any outside assistance,” said Toshiya Yamauchi, manager of foreign-exchange margin trading at Ueda Harlow Ltd. in Tokyo. “Uncertainties over sovereign risks in the region will continue to weigh heavily on the euro.”

The euro rallied on March 3 after Greece announced its third package of deficit-cutting measures as it seeks to alleviate Europe’s largest budget shortfall. Trichet yesterday spoke out against appealing to the IMF “as a supplier of help,” keeping pressure on Greece to cut its shortfall.

Europe’s Turn

Greek Finance Minister George Papaconstantinou said the European Union should outline the specifics of an aid package to send a message of “tangible solidarity” to markets.

“If they would be clearer in what way they’d help Greece if it were necessary, then Greece wouldn’t need support,” Papaconstantinou told Mega television, according to a transcript of his comments e-mailed yesterday by the Athens-based ministry.

Papandreou outlined a program on March 3 to save 4.8 billion euros ($6.6 billion) and said after those measures it’s now “Europe’s turn.”

The euro has slumped 8.6 percent in the past three months against the dollar amid concern that nations including Greece, Spain and Portugal will struggle to manage their budget shortfalls.

Moody’s Investors Service downgraded long-term deposit and senior debt ratings of Deutsche Bank AG, Germany’s biggest bank to Aa3, the fourth-highest level, from Aa1, spurring concerns that credit problems will spread in the region.