Extending yesterday's downtrend, the Japanese yen tumbled to new multi-month lows against the pound, euro and the Swiss franc during Tuesday's early trading as investors opted for higher-yielding assets following the U.S. government's plan to unlock toxic assets from banks' balance sheets in an effort to pull the economy out of recession.
Asian currencies like the Australian and New Zealand dollars are trading at more than 4-1/2 and 2-1/2 month highs against the Japanese unit.
Treasury secretary Timothy Geithner detailed the bank rescue plan yesterday. The plan to be implemented in conjunction with the Federal Deposit Insurance Corporation and the Federal Reserve, is expected to open up lending to consumers and small businesses.
The program will use to $100 billion in funds from the $700 billion financial rescue plan passed in 2008 in addition to capital from private investors to generate an estimated $500 billion to purchase the toxic assets, a number that could double to $1 trillion over time, the Treasury Department said.
A surge in equities exerted downward pressure on the yen. Usually, there is an inverse relationship between yen and stocks. When there is a stock market surge, yen falls and vice-versa.
Japan's benchmark interest rate is 0.1 percent, compared with 3.00 percent in New Zealand and 3.25 percent in Australia, alluring investors to the south Pacific nation's assets.
Minutes from the February 18 and 19 monetary policy meeting revealed today that board members of the Bank of Japan suggested that the Japanese economy may begin to recover from the current recession in the second half of this year at the earliest.
At the meeting, the board voted unanimously to keep the overnight call rate unchanged at 0.10 percent. The board also decided to expand special funds-supplying operations in order to facilitate a fall in longer-term interest rates that are actually applicable to fund-raising by firms and relieve them from funding concerns.
The Bank will continue to carefully assess the future outlook for economic activity and prices, closely considering the likelihood of its projections as well as risk factors, and to exert its utmost efforts as a central bank to facilitate the return of Japan's economy to a sustainable growth path with price stability, the minutes said.
The Japanese unit weakened in early dealings versus the euro, slumping to a fresh 5-month low of 134.54. If the yen slides further, 136.4 is seen as the next likely target level. At Monday's New York session close, the euro-yen pair was quoted at 132.20.
The euro has been climbing after the European Central Bank President Jean-Claude Trichet said yesterday that the bank remained wary of interest rates falling to zero.
After hitting a record low of 170.00 in July 2008, the yen gained 34% against the euro and reached a 7-year high of 112.08 on January 21, 2009, as investors fled from stock markets following the major economies entering a recession. The yen has been in a downtrend thereafter as world central banks announced financial packages to boost their economies and has lost around 16 % thus far.
Looking ahead, French business confidence indicator, British CPI and retail price index and Manufacturing PMI reports from France, Germany and Euro-Zone are expected in the upcoming session.
Tuesday in Asia, the yen continued to move lower versus the sterling, and dropped to its lowest point since December 01, 2008. The yen hit as low as 144.95 against the pound, which may be compared to yesterday's closing value of 141.33. The next downside target for the Japanese currency is seen around the 147.18 level.
The yen was the best performer in 2008 as the financial crisis prompted a dramatic unwinding of carry trades. The yen posted its biggest gain against the sterling in 2008, rising 42% on worries over rising unemployment in the U.K., deteriorating public finances and a series of aggressive U.K. interest rate cuts.
The yen that climbed to a record high of 118.88 against the pound on January 23 declined thereafter and lost around 17% thus far. Speaking in London yesterday, Bank of England member David Blanchflower said U.K.'s recession could last even longer than expected.
The yen plunged to a 6-day low of 98.41 against the US dollar in early deals on Tuesday. On the downside, the Japanese currency may likely target the 98.9 level against the buck. The dollar-yen pair closed yesterday's New York session at 96.97.
Yesterday's surprising news from the housing front supported the stock market rally, where U.S. existing home sales unexpectedly rose in the month of February. This news has also helped the dollar gain against the yen. However, the greenback fell against the euro and the franc.
Existing home sales rose 5.1 percent to a seasonally adjusted annual rate of 4.72 million units in February from a pace of 4.49 million units in January. Economists had expected sales to slip to a 4.45 million unit rate.
The Japanese yen weakened against its Swiss counterpart during Asian trading on Tuesday. At about 1:55 am ET, the yen touched a new multi-month low of 87.75 versus the franc, compared to 83.35 hit late Monday in New York. The next downside target for the yen is seen around the 88.9 level.
The yen also weakened against commodity related currencies during early trading. The yen slumped 20 percent against the Australian dollar and 21 percent versus the New Zealand dollar since February 02 and hit new multi-month lows of 69.65 and 56.37, respectively by about 1:55 am ET today. The yen was worth 68.40 against the Aussie and 55.48 against the kiwi at yesterday's close.
Against the Canadian currency, the yen touched its lowest level since January 06 during today's early trading. The yen hit a low of 80.60 by about 1:55 am ET, and if it falls further, it may find resistance around the 74.4 level. The loonie-yen pair closed yesterday's deals at 79.41.
Market players will have a busy day in the New York session where Geithner and Federal Reserve Chairman Ben Bernanke will testify at the House Financial Services Committee on the government's rescue of American International Group Inc.
AIG has come under severe attack for awarding multimillion-dollar bonuses to executives following a $180 billion bailout from the U.S. government.
Markets will also receive information on the Richmond region manufacturing sector. The Richmond Fed manufacturing index is expected to remain unchanged at -51 in March.
The Federal Housing Finance Agency will also release its house price index for January. House prices are expected to fall 0.9% following a 0.1% increase in December.
In the afternoon, James Bullard, President of the Federal Reserve Bank of St. Louis, will speak in London.
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