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Tuesday February 12, 2008 - 22:04:35 GMT
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FOREX NEWS-Yen tumbles broadly on Buffett bond rescue plan

Tue Feb 12, 2008 4:29pm EST

(Recasts, updates prices)

By Lucia Mutikani

NEW YORK, Feb 12 (Reuters) - The yen fell broadly on Tuesday after billionaire Warren Buffett offered to assume troubled bond insurers' liabilities, increasing investor appetite for risky assets such as stocks and high-yielding currencies.

Buffett told CNBC television that the plan of his Berkshire Hathaway company would cover $800 billion in municipal bonds, a step that investors hope might ease recent credit market turmoil.

The move reignited risk appetite, sparking a global stock markets rally and sending the low-yielding yen tumbling across the board. Investors often use the yen to fund acquisitions of higher yielding assets and currencies.

"I would attribute a lot of what's going on in the currency market to what's going on in the equities market. When investors feel confident, equities rise and we see some of the carry trades put back on," said Stephen Malyon, FX strategist at Scotia Capital in Toronto.

The euro jumped to a session high of 157.05 yen, before retracing slightly to trade at 156.46 yen <EURJPY=>, still 0.7 percent higher on the day. It firmed 0.4 percent to 1.6066 Swiss francs <EURCHF=>.

The dollar firmed 0.3 percent to 107.27 yen <JPY=>, but fell against the euro, which raced to a session peak of $1.4614 <EUR=>, before easing to $1.4581 -- up about 0.4 percent from late Monday.

A retreat by U.S. stocks' off earlier highs limited the euro and the dollar's advance versus the yen.


Bond insurers guarantee more than $2.4 trillion of debt and have been struggling to hold on to their top credit ratings after suffering heavy losses from backing mortgage securities that have plunged in value.

Markets worry that downgrades would rattle credit markets further and set off more large write-downs on Wall Street.

Analysts said Buffett's offer to bond insurers did not signal the end of market turmoil, and many said it did little to address underlying credit problems.

"As details become clear, I think the market will start reverting back to the recent pattern -- equity markets remaining under pressure, the dollar gaining some traction and the yen and Swiss gaining some traction as well," said Paresh Upadhyaya, currency analyst at Putnam Investments in Boston.

Low yielding currencies such as the yen and Swiss franc tend to attract flows during periods of uncertainty as their low interest rates reflect the capital surplus of their respective countries.

Sterling climbed 0.5 percent to $1.9612 <GBP=>, shaking off earlier losses suffered after a tame British inflation report boosted expectations of more Bank of England rate cuts ahead.

While a gauge of German business sentiment on Tuesday beat expectations, the euro didn't get much traction until Buffett revealed his bond insurer plan during early New York trade.

Analysts reckon this will not change expectations that the European Central Bank will cut interest rates later this year to counter slowing economic growth.

"The ECB really did subtly change its tone last week and they are in the process of turning the ship, if you will," said Sophia Drossos, senior FX strategist at Morgan Stanley in New York.

"It will take some time -- our sense is they won't be in a position to cut until April at the earliest -- but there's no more talk of their raising rates." (Additional Reporting by Steven C Johnson; editing by Leslie Adler)

© Reuters 2007. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world.


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