The dollar rose to a near-three month high against the yen on Monday as the Japanese currency fell broadly on expectations the US government could take a large stake in US lender Citigroup and inject more funds into troubled domestic banks. The Wall Street Journal reported the US government could take a stake of up to 40 per cent in Citigroup by converting preferred stock into common shares.
This eased fears the government will completely nationalise large US banks while bolstering optimism it will stay more proactive than other nations in stemming a recession. The dollar and yen had been seen as the two safe-haven currencies, but Monday's news madde the dollar more attractive "The news that Citi is in talks with the government for more capital in return for an increased equity stake is helping provide a bit of a sentiment boost," said Sacha Tihanyi, a currency strategist at Scotia Capital in Toronto.
"Though it seems a little bit premature as it is unclear whether any such move would leave the bank a private sector entity." The Treasury Department, Federal Reserve and three other federal agencies said in a joint statement they will initiate a program on Wednesday to assess large US banks' capital needs and determine whether a bigger buffer is warranted.
The US agencies insisted they do not want to nationalise banks as investors fretted over how struggling firms will cope with rising recession-driven losses. The euro reversed early gains against the dollar after European Central Bank President Jean-Claude Trichet said the euro-zone financial system is under severe strain and Fitch voiced concern about Austria's AAA rating.
In late afternoon trading in New York, the dollar was up 1.3 percent at 94.33 yen, less than half a yen from the near-three-month high of 94.94 yen touched earlier in the session, according to Reuters data. The euro rose 0.4 percent to 119.92 yen after earlier touching a one-month high of 121.91 yen. The euro erased early gains against the dollar, last trading down 1 percent at $1.2702, after trading at a 12-day peak of $1.2991.
Analysts said Trichet's comments brought back into focus the economic and banking woes in the euro zone, while the Fitch comments highlighted the problems facing some of the countries on the region's periphery.
"I was surprised how strong the euro was right at the start of the European session on the Citigroup news. This is potentially just based on reports so far," said Chris Turner, head of forex strategy at ING in London. Traders said investors were wary of more bad news emerging about the euro-zone economy, with the closely watched Ifo index on the German economic climate due on Tuesday.