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Wednesday September 13, 2006 - 11:05:07 GMT
Reuters - www.reuters.com

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FOREX-Yen rebounds before G7; Swissie languishes

FOREX-Yen rebounds before G7; Swissie languishes
Wed Sep 13, 2006 6:20am ET184

(Updates prices, adds quotes, changes byline)

By Sujata Rao

LONDON, Sept 13 (Reuters) - The yen rebounded from five-month lows versus the dollar on Wednesday, drawing support from this weekend's Group of Seven (G7) meeting though investors' renewed focus on carry trades could pose some risks to the Japanese currency.

The carry trade resurgence also hit fellow low-yielder Swiss franc which hit 6-1/2 year troughs versus the euro, and two-month lows against the dollar, especially after a Swiss central banker quashed talk of more aggressive rate hikes.

But the yen fared better due to expectations it will be discussed at this weekend's G7 finance ministers' meeting.

Speculation over what the G7 may say has helped to counteract yen-negative factors such as recent weak Japanese data and the currency's popularity as a funding unit for use in carry trades.

"(The yen rebound) is logical after the selloff which went pretty far yesterday. Ahead of the G7 it was possibly a bit aggressive because the meeting could yield some dollar-negative and yen-positive comments," said Peter Fontaine, currency strategist at KBC in Brussels.

"There is a risk that Asian currencies could come back so people have been taking chips off the table at this point."

By 1001 GMT, the yen had ticked up from Tuesday's five-month lows of 118.14 per dollar to trade at 117.61. It firmed about a quarter percent versus the euro to 149.23 yen .

The yen also received a boost after a senior Chinese parliament official said the rapid growth in the country's foreign exchange reserves is putting heavy pressure on the adjustment of the yuan exchange rate. He added that 2008 could be an appropriate time to make the yuan convertible.

While the yen ticked higher after the comments by Cheng Siwei, analysts saw the comments merely as part of China's ongoing gradual steps towards currency flexibility.

The prospect of a stronger yuan is usually seen as a reason to buy yen, considered a proxy for the tightly-controlled Chinese currency.

Traders are also reluctant to go short yen before a 1500 GMT speech by U.S. Treasury Secretary Henry Paulson. Some in the market expect Paulson to emphasise a strong dollar policy while expressing the need for structural reforms in Asian currencies.

On the other hand, the renewed interest in carry trades -- the practice of borrowing low-yielding currencies such as the yen to invest in higher-yield assets overseas -- could take a toll on the Japanese currency once the G7 is past, analysts say.

Japanese interest rates, at a meagre 0.25 percent, are expected to rise only slowly, making it an optimum currency to fund carry trades. On the other hand, rates have continued to increase in the euro zone and Britain, and could also still rise in the United States. "Clearly over the past month, carry trades have been in vogue and driving the market. For the Swiss franc and the yen, the low yielders, that is a risk going forward," said Martin McMahon, FX strategist at Credit Suisse in Zurich.

Euro/dollar moved sideways to trade flat at $1.2679 .

U.S. consumer prices and retail sales data later this week will be key for the dollar's fortunes as they may provide clues on whether U.S. interest rates have indeed stopped rising.

SWISSIE SELLOFF

The Swiss franc hit a 6-1/2 year low of 1.5911 francs per euro . The Swissie also hit a two-month low versus the dollar at 1.2549 francs .

Along with the yen, the Swiss franc is one of the lowest yielding major currencies. The Swiss National Bank is widely expected to raise rates by 25 basis points on Thursday, taking the mid-point of its target band for the three-month Swiss franc LIBOR to 1.75 percent.

In comparison, euro zone rates are at 3.0 percent and U.S. rates at 5.25 percent.

But any expectations for more aggressive tightening in Switzerland were quashed by SNB policymaker Philipp Hildebrand, who said in a magazine interview published on Tuesday that Swiss growth will slow next year.

"We and the market think that given his cautious statement on the economic cycle, a gradual approach in normalising rates may still be the bank's preferred scenario. As such, a more aggressive stance or even inter-meeting hikes have become less likely," UBS said in a note to clients.

Elsewhere, sterling slipped against the dollar and the euro after softer-than-expected rise in average earnings in the three months to July, meaning an interest rate rise in November is by no means a foregone conclusion.

© Reuters 2006. All Rights Reserve

 

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