March 24 (Bloomberg) -- The yen dropped to a five-month low against the euro and the dollar declined on speculation U.S. plans to help banks dispose of toxic assets will spur investors to seek higher yields.
The dollar approached a two-month low versus the European currency after Treasury Secretary Timothy Geithner unveiled proposals to finance as much as $1 trillion in purchases of illiquid property assets, damping demand for the safety of the greenback. South Korea’s won, Australia’s dollar and the British pound strengthened for a third day against the yen as Asian stocks extended a worldwide rally on optimism the worst of the global financial turmoil may be over.
“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 in Tokyo at Mizuho Asset Management Co., a unit of Japan’s second-largest bank. “Capital inflows into the currencies of emerging markets are rising.”
The yen fell 1.5 percent to 134.11 per euro as of 6:17 a.m. in London from 132.17 late yesterday in New York, after touching 134.51, the weakest level since Oct. 21. That’s the biggest loss since March 4. Japan’s currency slipped 1.2 percent to 98.10 per dollar from 96.95.
The dollar dropped to $1.3668 per euro from $1.3633 yesterday in New York. It reached $1.3738 on March 19, the lowest since Jan. 9. Against the British pound, the greenback fell to $1.4720 from $1.4572. It touched $1.4727, the lowest since Feb. 10.
Higher Yields
The yen weakened against all the 16 most-traded currencies on speculation the stock rally will spur investors to purchase higher-yielding assets overseas. Japan’s benchmark interest rate is 0.1 percent, compared with 1.5 percent in the euro region, and 3.25 percent in Australia.
South Korea’s won advanced 2.1 percent to 14.07 versus the yen, Australia’s dollar climbed 1.7 percent to 69.53 yen and the pound appreciated 2.4 percent to 144.65 yen. The U.K. currency reached 144.91 yen, the highest since Dec. 1.
The Nikkei 225 Stock Average rose 3.3 percent, its sixth gain in seven days, and the MSCI Asia Pacific Index of regional equities advanced 2 percent.
“Shares in the region are rising, suggesting improving risk-taking appetite among investors,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “Japan’s fundamentals are deteriorating. The yen will probably be sold.”
Japan’s currency also declined for a third day against the dollar on concern a government report tomorrow will show the economy posted a trade deficit for a fifth month, suggesting reduced demand for the nation’s exports.
Trade Deficit
The Finance Ministry may say tomorrow the custom-cleared trade shortfall was 20 billion yen ($205 million) in February, narrowing from a record 956.9 billion yen in January, according to a Bloomberg News survey of economists.
The yen has fallen versus 15 of the 16 major currencies this quarter, weakening the most versus Norway’s krone and Brazil’s real. Against the yen, the krone has surged 20 percent to 15.6492 and the real has climbed 12 percent to 43.7271.
The Dollar Index, which the ICE uses to track the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, dropped 5.4 percent in March, paring its gain this quarter to 2.4 percent. The Fed said on March 18 it would buy as much as $300 billion of Treasuries and increase purchases of agency mortgage-backed securities to cut borrowing costs.
“For now, the dollar should remain under pressure,” Ashley Davies, a Singapore-based currency strategist at UBS AG, wrote in a note today. “The dollar was undermined last week by the Fed’s action.”
Buy British Pound
Investors should buy the British pound against the yen on speculation the U.K. government’s strategy of pumping money into the financial system will boost banking shares, according to BNP Paribas SA.
The Bank of England bought 7 billion pounds ($10 billion) of gilts in the week through March 19 with newly created money using its Asset Purchase Facility. The central bank’s so-called quantitative easing has helped reduce the cost of protecting U.K. government bonds from default and is “positive” for assets such as equities and commodities, said BNP Paribas, France’s largest bank, in a research note yesterday.
“Sterling is the one way to trade that, given the correlation between sterling and financial stocks,” Sharada Selvanathan, a currency strategist in Hong Kong at BNP Paribas, said in an interview, confirming the note. “That’s a key reason why sterling-yen should have broken out, and it has broken out since yesterday.”
Credit default swaps on U.K. government debt dropped to 113.64 basis points yesterday from 122.00 basis points on March 20, according to CMA Datavision prices.
To contact the reporters on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.
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