The yen had its biggest two-day decline versus the euro in almost a
month as global government support of banks encouraged investors to buy
high-yielding assets funded by low-cost loans in Japan.
Japan's currency was poised for a record two-day drop versus the
Australian dollar as the U.S. plan to inject $250 billion into banks
raised speculation that investors will resume carry trades. The dollar
fell against the euro and the pound as governments' efforts to revive
bank lending reduced demand for the greenback as a haven.
``It's the unwinding of safe-haven positions,'' said Dustin Reid, a
senior currency strategist at ABN Amro Bank NV in Chicago. ``The
coordinated government intervention takes the probability of a
1930s-style depression off the table.''
Japan's currency pared its losses as the Standard & Poor's 500
Index fell 1 percent after initially gaining today and rallying
yesterday the most in seven decades.
``You'd better play this rebound of the carry trade, but you'd be
looking for opportunities to sell this rally in the next couple of
weeks,'' said Stephen Malyon, co-head of currency strategy at Scotia
Capital Inc. in Toronto. ``The honeymoon will end. We're facing a
prolonged period of lackluster growth of the global economy.''
The London interbank offered rate, or Libor, for three-month dollar
loans dropped 12 basis points to 4.64 percent, reflecting increased
willingness of banks to lend.
Treasury Secretary Henry Paulson urged banks receiving capital
injections to use the funds to spur economic growth. People familiar
with the plan said nine financial institutions, including Citigroup
Inc. and Goldman Sachs Group Inc., will get $125 billion.
European countries committed $1.8 trillion to guarantee loans and
invest in lenders yesterday. Japan and Australia pumped $9.1 billion
today into money markets after European leaders agreed to guarantee new
debt from financial institutions and use taxpayer money to rescue banks.
Action in Europe may not prevent the euro from weakening, some currency
strategists and investors said. Morgan Stanley predicts a decline in
the euro to $1.25 by 2009, from the all- time high of $1.6038 in
mid-July. Strategists at BNP Paribas see weakness after ``some support
in the near term.''
``The euro was overbought, over-owned, over-rated and overvalued,''
said Stephen Jen, global head of currency research at Morgan Stanley in
London. Jen correctly predicted in July that the euro would slump just
as it began to weaken 15 percent from its record. ``The strategic view
has to be that a global recession will keep seeing the euro sold off,''
he said.