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Tuesday January 23, 2007 - 11:39:41 GMT
Reuters - www.reuters.com

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FOREX-Sterling at multi-yr highs on carry buying spree

FOREX-Sterling at multi-yr highs on carry buying spree
Tue Jan 23, 2007 6:22am ET147

(Changes byline, updates prices, adds quotes)

By Veronica Brown

LONDON, Jan 23 (Reuters) - A resurgent sterling hit 14-year peaks against the yen and dollar on Tuesday, while the euro homed in on record highs versus the low-yielding Japanese currency as investors chased units with higher returns.

With Japanese interest rates at just 0.25 percent and doubts about whether the Bank of Japan will tighten in February, carry trades -- borrowing the yen and other low yielding currencies to fund investments in higher return units -- got a new surge in popularity.

Analysts said British interest rates level with those in the United States at 5.25 percent, and possibly rising, made sterling/yen the carry trade of choice.

Euro/yen also benefited from hawkish comments by European Central Bank officials [nL23535132] who said euro zone interest rates may need to rise from the current 3.5 percent.

"Carry still seems to be a dominant theme in the market. Markets continue to be getting more hawkish on UK interest rates relative to the U.S. even. It's the same in Europe after hawkish comments from ECB officials," Mitul Kotecha, head of global foreign exchange research at Calyon said.

"Any currency that shows some sentiment towards higher rates is getting pushed higher -- sterling and the euro are key currencies in this," he added.

The yen has been on the defensive since the BOJ left the overnight call rate steady last Thursday, which raised questions about whether government pressure had influenced it against a move and convinced investors that rates will stay low for a while.

The minutes of the BOJ's December meeting released on Tuesday revealed some of the politics at play, with a Cabinet Office official saying at the gathering that more attention should be paid to the economy's downside risks.

By 1106 GMT, sterling had climbed to 241.04 yen -- a level last seen in September 1992. Traders said the move in sterling/yen sparked the pound's rise to 14-year peaks against the dollar above $1.9850 .

The Bank of England's surprise rate hike earlier this month boosted sterling's yield appeal. BoE minutes from that meeting, to be released on Wednesday, will be closely scrutinised. Sterling hit 4-year highs versus the euro at 65.37 pence , while the single European currency rose to 158.07 yen -- a whisker away from record peaks above 158 struck earlier this month .

DOLLAR RALLY STALLS

The dollar edged down to 121.43 yen , just below a near 4-year high of 121.79 yen struck on Monday. The euro was 0.4 percent firmer at $1.3006 .

The dollar had been boosted after a string of economic data last week bolstered views that the Federal Reserve was unlikely to trim interest rates from 5.25 percent soon. But with a rate cut mostly priced out, the rally ran out of steam as few market players were willing to bet on rates being hiked.

Trading was subdued with a relatively light economic data calendar on Tuesday. ECB Governing Council member Erkki Liikanen is due to speak in Stockholm at 1700 GMT and BoE Governor Mervyn King speaks in Birmingham, England, at 1900 GMT.

Market participants are awaiting U.S. housing data later in the week to confirm that the housing market has overcome a soft patch, and Germany's Ifo survey of business sentiment for January, due on Thursday. The index could add to expectations for a rate rise by the European Central Bank in March.

"Euro/dollar continues to trade within a very tight $1.2895-1.3000 range and there seem few catalysts for a break-out today ... The best chance for a top-side move may come on hawkish BoE minutes tomorrow or a strong German Ifo on Thursday," ING said in a note to clients.

© Reuters 2007. All Rights Reserved.

 

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