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Wednesday January 23, 2008 - 12:34:23 GMT
Reuters - www.reuters.com

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FOREX NEWS-Yen strengthens as risk aversion continues

Wed Jan 23, 2008 7:09am EST

(Recasts, changes byline, updates prices)

By Simon Falush

LONDON, Jan 23 (Reuters) - The yen strengthened broadly on Wednesday as nervousness about the health of the global economy persisted despite a hefty cut in interest rates from the Federal Reserve on Tuesday.

The yen lost ground in late Asian trading as the Fed's 75 basis point cut in its federal funds target rate to 3.5 percent boosted equities and led investors to edge back into carry trades, where they borrow low-yielding currencies to fund purchases of higher yielding assets.

However a sense that problems in the U.S. market are set to spread to the wider global economy has kept risk aversion high, which has pushed investors back into safe haven currencies like the yen.

"The recovery in risk appetite after the Fed cut was only temporary," said Niels From at Dresdner Kleinwort in Frankfurt.

"After digesting the news, markets have come to the conclusion that it will not resolve problems in the U.S. economy and this is weighing on the carry trade, supporting funding currencies like the yen."

At 1147 GMT the dollar was down 0.7 percent against the yen at 105.72 <JPY=>. The Australian <AUD=> and New Zealand dollars <NZD=> and sterling <GBP=>, destinations for the carry trade, all lost ground.

The euro was also under pressure as euro zone services growth fell below forecasts to a rate not seen in over four years [ID:nL22535993], adding to the case for an interest rate cut from the European Central Bank.

Euro zone interest rate futures now expect around 75 basis points of ECB easing this year from their current 4 percent level, with the first rate cut expected before June. Futures at the start of January pointed to the ECB on hold all year.

The euro was down 1.2 percent at 153.97 yen <EURJPY=> and down half a percent against the dollar at $1.4564 <EUR=>.

RATES FALLING

Even after the Fed's move on Tuesday, interest rate futures still put a 90 percent probability of a further 50 basis points easing at its policy meeting next week FEDWATCH.

These contracts show traders betting on the Fed easing further to as low as 2 percent by the end of the year.

Rates are also thought to be on a downward path in the UK with Bank of England Governor Mervyn King in a speech on Tuesday giving a strong hint the Bank will cut rates at its policy meeting in early February, highlighting the risks to growth.

Only one member of the BoE's nine-man Monetary Policy Committee voted for a cut in interest rates in January, but analysts are convinced that rates are set to fall sharply from the current 5.5 percent.

"Rates should at least be coming down to neutrality at 4.50 percent in this cycle, with better odds of 4.0 percent being targeted to get policy slightly stimulative again," said Bear Stearns in a note to clients.

"If the MPC have missed the boat on a pro-cyclical stimulus, they may end being forced to do more in the long run."

© 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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