Yen Rises as Auto Bailout Failure Reduces Risk Appetite

12-12-2008 11:15

A 14 billion dollar rescue loan for the automakers was rejected by the Senate last night, leaving the future of the U.S. auto industry in question. The House passed the plan on Wednesday but the Senate was also needed to pass a similar version of the legislation. Yen rose after the news of the failure as investors pared carry-trading and holdings of higher-yielding assets.

Joblosses

Analysts believe that the failure of GM, Chrysler, and Ford, the so-called big three automakers, would not be limited to the auto industry but the whole economy would suffer from rising unemployment and deteriorating confidence.

As a sign that the recession is deepening, the weekly jobless claims jumped to 573,000 in the week ended Dec. 6, Labor Department reported on Thursday. The economy has lost nearly 2 millions jobs this year and estimates show that the bankruptcy of the automakers could cost another 2.5 millions jobs.

A report today from the Commerce Department is also expected to show that retail sales fell as much as 2 percent in November. Excluding autos, analysts expect purchases to fall 1.8 percent, showing that cutting back in consumers' spending includes a broad range of products.

Risk Aversion

Asian equity indexes and U.S. futures fell after the report of the Senate rejection. Shares of car makers like Nissan led declines in Tokyo on anticipation that the negative consequences would not be limited to the rivals.

Japanese yen rose against all major currencies as worries about the economy reduced investors' appetite for taking risk. U.S. dollar extends its weekly decline, falling below 89 against the yen in Asian markets.

Yen and Japanese Intervention

Speculations about a currency intervention rise as the yen trades at a decade high against the dollar. In reaction to the today's movement, Japan Finance Minister Shoichi Nakagawa downgraded the possibility of an immediate intervention while repeating that excessive volatility in Forex is "undesirable".

Japan has always expressed concerns about high value of the yen. Like any other export-oriented economy, the fear is that higher value of the nation's currency reduces foreigners' demand for exports.

In a pure intervention, central banks buy or sell currencies to affect prices in the Forex market.