Get 40% Off
⚠ Earnings Alert! Which stocks are poised to surge?
See the stocks on our ProPicks radar. These strategies gained 19.7% year-to-date.
Unlock full list

FOREX-Yen weakens; investors contrast rate outlooks

Published 03/30/2011, 12:07 PM
Updated 03/30/2011, 12:12 PM

* Yen falls broadly, EUR/JPY hits 10-month high

* Market focus on rate differentials

* Asset managers go tentatively long carry trades (Recasts, updates prices, adds detail, comment)

NEW YORK, March 30 (Reuters) - The yen weakened across the board on Wednesday, sliding to a 10-month low against the euro, as recent hawkish comments from euro zone and U.S. officials contrasted with Japan's loose monetary policy.

The euro rose to around 117.28 yen on electronic trading platform EBS, its strongest since May 2010, and was seen climbing more on expectations the European Central Bank will start raising interest rates as early as next month.

Rising risk appetite encouraged investors to seek higher-yielding assets, with the Australian dollar climbing to a 29-year high over its U.S. counterpart and a 10-month high against the yen.

"The new high in the Australian dollar, combined with weakness in yen, suggest that the carry trade is building momentum," said Camilla Sutton, chief currency strategist at Scotia Capital in Toronto. "This could put significant weakening pressure on yen, but we would not be surprised to see some dollar/yen downside (yen strength) on the back of ongoing repatriation in late in April."

The U.S. dollar rose to around 83.19 yen , a level last seen on March 11, when the yen initially fell after Japan's earthquake. It last traded at 82.98 yen, up 0.6 percent.

Traders reported offers at 83.30/50, with orders said to be thin until more supply placed at around 84.00.

Hawkish comments in recent days from U.S. Federal Reserve and European Central Bank officials contrasted with the stance taken by the Bank of Japan, which is set to leave interest rates near zero for some time to support the world's third-largest economy as it recovers from the effects of the earthquake.

Dallas Fed President Richard Fisher said on Tuesday he would vote against further monetary easing after the Federal Reserve's $600 billion bond-buying program ends in June. [ID:nN2984973]

That pushed up short-dated U.S. Treasury yields, widening their differential with Japanese yields as investors took the comments as an indication of eventual monetary tightening.

Those yield differentials are key to the revival of the "carry trade," in which investors borrow in low-yielding, low-risk currencies such as the yen and buy riskier assets elsewhere. The yen has also become a prime funding vehicle because of large injections of cash by the Bank of Japan into the Japanese economy after the recent earthquake and tsunami.

"You can see the euro/yen relationship indicating that yen carry trade is being put back into play," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.

The euro was down 0.1 percent on the day at $1.4097 but up 0.5 percent against the yen at 116.95 yen on electronic trading platform EBS.

The euro is more than 5.0 percent higher against the dollar this year, and its apparent resilience to fiscal problems facing weak euro zone countries has led some to nickname it the "Teflon euro."

"I would be confident in the euro at these levels," said Pierre Lequeux, head of currency management at Aviva Investors. "I like the euro, basically, and I see some upside."

AUSSIE SHINES

Speculation that Japanese investors may reduce dollar hedging positions related to their overseas investments, and the absence of huge repatriation flows following the quake, are shifting the focus back to economic fundamentals and reinforcing the yen's status as a funding currency.

"We're seeing asset managers and hedge funds starting to dip their toes back into carry trades, but it's quite tentative at this stage," said Geoffrey Yu, currency strategist at UBS, in an interview with Reuters Insider. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ http://link.reuters.com/gen78r ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

The market's focus on rate differentials benefited higher-yielding currencies such as the Australian dollar , which traded at $1.0322, near a 29-year high of $1.0334 hit earlier in the global trading day.

The Aussie traded at 85.61 yen after earlier climbing to a 10-month high. (Additional reporting by Chuck Mikolajczak in New York and Naomi Tajitsu in London) (Reporting by Nick Olivari; Editing by Dan Grebler)

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.