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Wednesday February 28, 2007 - 11:36:23 GMT
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FOREX-Yen pares gains after carry shakeout, dollar rises

FOREX-Yen pares gains after carry shakeout, dollar rises
Wed Feb 28, 2007 6:22am ET20

(Updates price, adds quotes)

By Natsuko Waki

LONDON, Feb 28 (Reuters) - The yen pared the previous session's gains on Wednesday while the dollar rose broadly after investors paused from unwinding risky carry trades and looked ahead to key U.S. data due later.

Concerns about rising volatility in financial markets, sparked by a tumble in global equities and soft U.S. data on Tuesday, had prompted investors to reduce risk exposure and buy back low-yielding currencies such as the yen.

After pushing the yen higher by 2 percent against the dollar on Tuesday, its biggest one-day jump in 14 months, investors are awaiting to see if the dollar's fall will snowball with the U.S. fourth-quarter data which is expected to revised sharply lower.

This week's other data on manufacturing and inflation could also add to recent evidence of a U.S. economic slowdown, which could fan expectations for a yield-lowering interest rate cut by the Federal Reserve this year.

"The dust is settling a little bit after yesterday. Carry trades are reliant on continued low financial market volatility. Yesterday was a wake up call that volatility may rise as we move into the late stage of a business cycle," said Chris Turner, head of FX strategy at ING.

"(The U.S. data) will be pretty negative on the activity side which will point to a slowdown in Q2 and boost expectations that the Fed might need to respond. We are going to have a nervous market for the next 3-4 weeks."

By 1100 GMT, the dollar was up more than half a percent on the day at 118.62 yen , having fallen to a 10-week low of 117.48 on Tuesday. The euro was up 0.1 percent at 156.32 yen after touching a 3-week trough of 155.71 on Tuesday.

The single European currency was down 0.4 percent to $1.3188 , pulling away from a two-month high of $1.3259 hit in the previous session.

U.S. fourth-quarter growth is expected to be revised lower to 2.4 percent on the quarter from an initially reported 3.5 percent. The Chicago manufacturing survey and January home sales data are also due.


Investors have been keen to use low-yielding yen as a cheap funding source for higher-return assets in carry trades, which helped drive the Japanese currency to a record low against the euro last week.

Low volatility and Japan's rock-bottom interest rates had contributed to the popularity of yen carry trades.

But risk aversion plays swept the Japanese currency sharply up across the board on Tuesday against several currencies, including sterling and the Australian and New Zealand dollars.

Yen implied one-month volatility jumped after the yen's rally and dollar sell-off, hitting a seven-month high of 8.75 percent .

"In the past few years, downward corrections in the yen crosses have tended to be quite large (4-6 percent). So we do not rule out a further decline in dollar/yen towards 115," Barclays Capital said in a note to clients.

"But (we) retain our view that structural capital outflow by Japanese individual investors will see yen depreciation resume in the medium term."

Global stock markets were still reeling from Wall Street's tumble on Tuesday which was its biggest since September 11, 2001 attacks on the United States.

European shares were down around 1 percent, however China's Shanghai index, whose 9 percent plunge on Tuesday sparked a rout in global equity markets, gained 1.4 percent.

© Reuters 2007. All Rights Reserved.


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