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Thursday January 25, 2007 - 11:11:54 GMT
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Yen rallies ahead of G7 as carry trades unwind

Yen rallies ahead of G7 as carry trades unwind
Thu Jan 25, 2007 5:09am ET17

By Simon Falush

LONDON, Jan 25 (Reuters) - The yen rose against major currencies on Thursday, extending the previous day's rise after a source said European officials want to complain about the weak yen at the next Group of Seven meeting.

The euro pared earlier gains versus the dollar after the key German Ifo business sentiment index fell unexpectedly in January, unsettling confidence in the strength of the euro zone's biggest economy.

Ifo economist Klaus Abberger said there was no significant impact on the index from the exchange rate. However some companies and officials in the euro zone have voiced concerns about the euro's strength -- especially against the yen.

A source close to the preparation of next month's G7 talks said on Wednesday that Europe will seek a more forceful message from the meeting on the yen's weakness.

The comments intensified an unwinding of carry trades -- when investors borrow the yen to benefit from higher interest rates elsewhere -- which had been kick-started by falls in high yielding sterling and Australian dollar on Wednesday.

"The yen rallied ... as investors unwound short yen positions," said David Bloom, chief currency strategist at HSBC.

Asian Development Bank President Haruhiko Kuroda said yen weakness from carry trades has gone too far, and that he sees a risk they will unwind within two years. His comments gave further support to the yen.

At 0942 GMT, the dollar was down 0.5 percent at 120.41 yen . The euro was also half a percent lower at 156.21 yen , more than two yen below the previous day's record high.

The euro was steady on the day at $1.2969 , around 20 ticks below pre-Ifo levels.

The headline German Ifo index fell to 107.9 from December's 108.7, confounding forecasts for a rise to 109. The current conditions index also fell.

But the euro's losses after the data were limited as the numbers did little to change expectations for more interest rate hikes from the European Central Bank in coming months.

"If the ECB wants to hike rates there is clearly room to do it," Michael Klawitter, currency strategist at Dresdner Kleinwort in Frankfurt.

The dollar by, contrast, is likely to face headwinds.

"There is every chance at the G7 meeting ... that the topic of structural imbalances will come up and their attention could focus on structural problems such as the (U.S.) trade deficit," Klawitter added.

Investors will also be watching for any comments on currencies from the meeting of central bankers and finance ministers from the world's top economies on Feb 9-10.

Japanese Finance Minister Koji Omi said he had not heard that the yen would be a topic of discussion at the G7 and repeated the ministry's usual refrain that currencies should reflect economic fundamentals.

At the last G7 meeting, Japan's finance minister and European officials seemed to make coordinated comments that the yen should reflect Japan's economic recovery, but the talk did little to stop its fall.

A trader for a major Japanese bank said there seemed to be some "massive" unwinding of yen carry trades, adding that the amount of yen short-covering flows that he had heard about were unusually large.

© Reuters 2007. All Rights Reserved.


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