Wednesday January 23, 2008 - 12:34:23 GMT
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Reuters - www.reuters.com
FOREX NEWS-Yen strengthens as risk aversion continues
(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 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=>.
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."
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