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Monday May 12, 2008 - 22:53:39 GMT
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FOREX NEWS-Dollar up versus yen on risk demand, down vs euro

 
Mon May 12, 2008 4:10pm EDT

* Dollar firms versus yen, Swiss franc as equities rise

* Dollar falls against high yielders on carry trades

* U.S. data, including Tuesday's retail sales, awaited (Recasts, adds comments, changes byline)

By Vivianne Rodrigues

NEW YORK, May 12 (Reuters) - The dollar rose against the Japanese yen and Swiss franc on Monday as investors snapped up riskier assets such as stocks, encouraged by a dip in oil prices and unexpectedly strong earnings from HSBC.

The slight rise in investors' appetite for risk revived interest in carry trades, helping to lift the high-yielding euro, sterling and Australian and New Zealand dollars against the U.S. currency.

In carry trades, investors borrow against the yen or other low-yielding currency to buy assets offering higher returns. Some analysts now regard the dollar as a funding currency after the Federal Reserve slashed its key overnight lending rate by 3.25 percentage points to 2 percent since mid-September.

"With equities moving higher, we are having a little flow back into carry trades, which is helping euro/yen and propping the euro up against the dollar, in addition to sterling and the other high yielders," said Mark Meadows, senior currency strategist at Tempus Consulting in Washington.

By late afternoon, the dollar was trading at 103.90 yen <JPY=>, up 1 percent on the day. Against the Swiss franc <CHF=>, the dollar was up 0.4 percent at 1.0445 francs.

The euro vaulted 1.4 percent to an intraday peak of 161.42 yen <EURJPY=>, helping the euro zone currency to erase losses against the dollar. The euro last traded up 0.4 percent at $1.5534 <EUR=>.

There is a strong correlation between the euro/yen and stocks, and gains in the currency pair tend to feed through to euro/dollar.

Traders also attributed the euro's advance against the dollar to stop-losses above the $1.55 area amid thin liquidity, with most European markets closed.

"There are stop-losses above 1.55 on euro/dollar, which could be driving us up here. Euro/yen strength is also strengthening the euro (against the dollar)," said Firas Askari, head currency trader at BMO Capital Markets in Toronto.

BIG DATA SLATE

United States and global stocks were cheered by news that European banking heavyweight HSBC (HSBA.L: Quote, Profile, Research) posted unexpectedly strong first-quarter earnings and a fall in oil prices CLc1.

Investors will watch a big slate of economic data on Tuesday, especially April U.S. retail sales, as well as speeches by Fed officials for clues on whether the U.S. central bank will cut benchmark interest rates again next month.

"This week will provide fundamental evidence as to where the U.S. dollar should move from here as the market will receive a multitude of important updates including retail sales, CPI, Philly Fed, housing starts and Michigan confidence," Camilla Sutton, a currency strategist at Scotia Capital in Toronto, said in a note.

Chicago Fed President Charles Evans said the consumer was "under a lot of stress" and the economy faced downside risks.

Short-term interest rate futures FFG8, which track market expectations for Fed monetary policy, show an 86 percent perceived chance that the Fed will keep benchmark lending rates unchanged at 2 percent when it next meets on June 25.

At the same time, mounting signs that European growth is stumbling has stirred speculation the European Central Bank could edge towards trimming rates for the first time in nearly a year. This could boost the dollar, whose appeal has been undermined by the Fed's aggressive rate cuts.

"The outlook has become clouded over recent weeks as euro zone growth has shown clear evidence that it is decelerating, while inflationary pressures are ongoing," Sutton at Scotia Capital added.

News that a major earthquake had shaken parts of China had limited impact on the currency market as the disturbance happened in regions not relevant for the country's external trade. For more click on [ID:nSP239734].

Still, market analysts at Merrill Lynch & Co said in a note that if casualties turned out to be big, business in Beijing may "temporarily stall." (Additional reporting by Lucia Mutikani; Editing by James Dalgleish)

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