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Dollar Weakens Versus Euro; Koizumi Says Japan May Diversify

March 10 (Bloomberg) -- The dollar fell to a nine-week low against the euro in Europe after Japanese Prime Minister Junichiro Koizumi said his country ``in general'' needs to consider diversifying its foreign currency reserves, the world's largest.

The U.S. currency pared losses after a Ministry of Finance official said Japan has no plan to make a change, comments echoed by Finance Minister Sadakazu Tanigaki. Japan's official currency reserves totaled $820.5 billion at the end of February, mostly in U.S. Treasuries.

``By saying Japan could diversify its holdings, it's opened a Pandora's Box,'' said Harvinder Kalirai, chief market analyst in Sydney at State Street Corp. ``They can just stop buying Treasuries. It could impact the behavior of other central banks. This is going to weigh heavily on the dollar.''

The dollar dropped to $1.3424 per euro at 6:54 a.m. in London from $1.3391 late yesterday in New York, according to electronic currency-dealing system EBS. The yen traded at 104.08 per dollar, from 103.93, after a government report showed Japanese machinery orders unexpectedly fell.

The U.S. currency dropped as low as $1.3455 a euro, the weakest since Jan. 4, and may fall to a record $1.40 per euro this year, Kalirai said. State Street is the world's largest custodian of assets, managing more than $1.2 trillion.

Japan's currency weakened against the dollar and tumbled against the euro after the government report showed machinery orders dropped 2.2 percent in January from December. The median estimate in a Bloomberg survey was for a 2.5 percent gain.

`Not Good'

``Machinery orders were not good for the yen, while Koizumi's remarks are dollar-negative, so the best bet is to sell the yen against the euro,'' said Ashley Davies, a currency strategist in Singapore at UBS AG.

Against the euro, the yen declined to 139.71, from 139.18. The yen may weaken to 140 per euro today, Davies said.

Speaking in Parliament, Koizumi said Japan needs to make an ``overall judgment'' on how to invest reserves by considering the stability of such investments. Tanigaki later said the comments were made as a general argument and don't mean the government will shift its holdings.

The dollar fell 1.4 percent against the euro and the yen on Feb. 22 after South Korea's central bank announced plans to boost returns by diversifying its currency reserves. The bank later said it wouldn't sell dollars from its holdings to achieve its goal.

It's Understandable

``There's never been a comment from Japan that it might diversify, so the dollar getting sold off is understandable,'' said Robert Rennie, a currency strategist in Sydney at Westpac Banking Corp. Ministry clarifications ``helped shore it back up.''

Koizumi's comments pushed U.S. 10-year Treasury yields to the highest in more than seven months. Japan owned $711.8 billion of U.S. Treasuries as of December, the largest foreign holder. The government cut its note holdings in three of the last four months of 2004.

The yield on the benchmark 4 percent note due in February 2015 rose 2 basis points, or 0.02 percentage point, to 4.55 percent, the according to bond broker Cantor Fitzgerald LP. It was 4.57 percent, the highest since July 30.

The dollar's decline may be limited ahead of a report today that may show U.S. jobless claims held at the third-lowest level since October 2000. The rise in yields may also increase the attractiveness of U.S. assets.

Yields Going Higher

``The dollar should find some strength against both the euro and the yen,'' said David Mozina, a currency strategist in Sydney at ABN Amro Holding NV. ``Yields are still going higher in the U.S., and that should spur buying interest'' in the U.S. currency.

A reading of 310,000 is forecast for initial jobless claims in the week that ended March 5, according to the median estimate in a Bloomberg News survey of 34 economists.

Demand for U.S. Treasuries is strong and any rebalancing of foreign currency reserves would not have a significant affect on the Treasury market or economy, Randal Quarles, U.S. Treasury assistant secretary for international affairs, told reporters at the Foreign Correspondents Club of Japan in Tokyo.

The dollar slid as much as half a percent against the euro on Jan. 24, after a survey sponsored by Royal Bank of Scotland Plc showed central banks boosted euro holdings.

Almost 70 percent of the 56 central banks surveyed said they increased exposure to the 12-nation currency, according to the survey conducted by Central Banking Publications Ltd., a London- based publisher, between September and December 2004.

In other trading, the dollar fell to 1.1553 Swiss francs, from 1.1588 francs. The British pound rose to $1.9274, from $1.9254.

To contact the reporter on this story:

John Brinsley in Tokyo at [email protected].

To contact the editor responsible for this story:

Beth Thomas in Tokyo [email protected];

Dan Moss at

or at [email protected].

Last Updated: March 10, 2005 02:16 EST