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Monday March 5, 2007 - 21:47:16 GMT
Reuters - www.reuters.com

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FOREX NEWS-Yen rises for third day on pullback in risk taking

FOREX-Yen rises for third day on pullback in risk taking
Mon Mar 5, 2007 4:42pm ET18

(Updates prices, adds comments)

By Kevin Plumberg

NEW YORK, March 5 (Reuters) - The yen climbed against the dollar on Monday for the third consecutive session as investors watching falling global stock prices continued to unwind risky trades funded by borrowing cheaply in the Japanese currency.

The dollar sank below 116 yen for the first time since early December, falling around 5 yen in the past week, due to the swift shift in investors' penchant for risk that began last week following the biggest one-week drop in U.S. stocks since 2003.

"Yen carry trades are 'risky,' and investors tend to avoid them whenever there is a risk shock like the one that occurred last week," said Jay Bryson, global economist with Wachovia Securities in Charlotte, North Carolina.

Depending on the outcome of upcoming U.S. economic data, "further dollar weakness versus the yen in the weeks ahead seems likely," Bryson said.

By late afternoon in New York, the dollar was down about 1 percent at 115.72 yen, after dropping to a three-month low of 115.16 yen earlier in the session.

The euro had fallen as low as 150.89 yen , according to electronic trading platform EBS -- its lowest level since late November -- and was last down 1.8 percent on the day at 151.44 yen.

The European common currency last week suffered its biggest weekly percentage loss against the yen since August 2003, after hitting a record high near 160 in February.

Sterling sank 2 percent to 222.06 yen after earlier hitting a five-month low of 221.20 yen. The pound had been one of the biggest beneficiaries of the carry trade financed by the yen or Swiss franc.

Meanwhile, the euro was down 0.8 percent at $1.3090 , likely weighed by the euro's losses against the yen. Against the Swiss franc, the dollar traded up 0.4 percent at 1.2210 francs .

CENTRAL BANKS, STOCKS AND THE DOLLAR

As global stock markets show no sign of letting up from the ongoing selloff, market volatility would likely keep rising in the currency market, especially given central bank policy meetings this week in Australia, Britain, Canada, the euro zone and New Zealand.

Throughout the meltdown in global equity markets and the vicious yen rally, the dollar has by and large remained within a broad trading range against most major currencies.

In fact, the dollar index <.DXY> -- a measure of the greenback's performance against six other major currencies -- is up 0.7 percent from last Tuesday's two-month low.

Market participants said the price action has been concentrated in the yen because of the buildup of short positions. In addition the subsequent flight to safety into U.S. Treasury debt may be supportive for the dollar broadly.

"If risk-reduction continues, the dollar index will increasingly gain broad strength," said Stephen Jen, global head of currency research with Morgan Stanley in London.

Though many analysts agree that in the short term, the yen will continue to benefit from a sharp pullback in investor risk taking, some say the Japanese currency will weaken once the dust settles.

"Without economic support for a stronger currency, which is currently not the case, the yen will likely fall back to its lows once near-term market turmoil dies down," analysts with BCA Research said in a note to clients.

© Reuters 2007. All Rights Reserved

 

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