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Wednesday February 7, 2007 - 10:10:12 GMT
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FOREX-Yen back on defensive, pre-G7 short covering eases

FOREX-Yen back on defensive, pre-G7 short covering eases
Wed Feb 7, 2007 4:23am ET161

(Changes dateline, byline, adds quotes, update prices)

By Veronica Brown

LONDON, Feb 7 (Reuters) - The yen resumed its fall against the dollar and euro on Wednesday as investors eased back from off-loading short yen positions ahead of this weekend's Group of Seven meeting, where the Japanese currency's weakness is set to be discussed.

The yen's slide of some 16 percent in the past three years to successive record lows against the euro has captured market attention, with European officials determined to take the issue up at the G7 meeting in Essen, Germany, on Feb. 9-10.

But U.S. and Japanese officials have continued to play down the issue, leading many analysts to conclude that the yen will not be singled out for attention in the post-meeting statement.

"There's a very strong consensus in the market that the yen will not be an issue even if the Europeans push from the sidelines," BTM-UFJ currency economist Derek Halpenny said.

A senior official at Japan's Finance Ministry said on Wednesday that the yen could be discussed at the G7 but that it was unlikely to be the main subject of the talks.

That followed U.S. Treasury Secretary Henry Paulson saying on Tuesday that the yen's value was set by market fundamentals, suggesting Washington does not have a problem with a weak yen.

The yen is the lowest-yielding currency among industrialised countries, with official interest rates at 0.25 percent, well below 5.25 percent in the United States and 3.5 percent in the euro zone.

That has encouraged investors to use it as a funding unit for higher yields elsewhere, pushing the euro up to a record high against the yen, while the dollar hit a four-year high above 122 yen in late January.

Some traders said carry trade flows reflected economic fundamentals, and the G7's best tactic might be to mention the risk of a reversal to such trades, as the Bank of Japan could raise interest rates if consumer prices and spending pick up.

"With recent yen short covering, some of our customers are now left with short dollar positions. Hedge funds were also seen booking profits as they unwound some of the carry trades when the yen rose on recent short covering," a senior trader at a large Japanese security firm said.

By 0903 GMT, the dollar was up a third of a percent on the day at 120.44 yen . The euro also gained 0.3 percent to 156.38 yen , rebounding from a three-week lows hit on Tuesday. The single currency was flat against the dollar at $1.2986 .


Interest rate differentials were seen grabbing some attention away from the upcoming G7 gathering, as the Bank of England kicks off its two-day rate setting meeting with a European Central Bank rate decision also due on Thursday.

The BoE's Monetary Policy Committee is widely expected to leave rates on hold at 5.25 percent on Thursday but following its surprise rate increase last month, traders are not entirely dismissing the MPC's ability to surprise again.

The ECB is also expected to keep interest rates on hold at 3.5 percent and traders were eyeing post-meeting comments from ECB President Jean-Claude Trichet for clues about the future path of monetary policy in the euro zone.

With U.S. data relatively thin on the ground, investors were expected to focus again on Paulson's testimony on the 2008 budget before the House Budget Committee, but analysts say his presentation will probably be similar to Tuesday's.

© Reuters 2007. All Rights Reserved.


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