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Tuesday March 13, 2007 - 21:57:56 GMT
Reuters - www.reuters.com

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FOREX NEWS-Yen surges as investors pare risk

FOREX-Yen surges as investors pare risk
Tue Mar 13, 2007 4:44pm "

(Updates prices, adds comments)

By Gertrude Chavez-Dreyfuss

NEW YORK, March 13 (Reuters) - The yen soared across the board on Tuesday as worries about the U.S. subprime mortgage sector pushed investors to further unwind trades funded by borrowing at low rates in the Japanese currency.

Strength in currencies with low interest rates, along with lower U.S. equities, suggested that a shakeout two weeks ago in carry trades -- a strategy in which investors borrow cheaply to buy higher-yielding assets or currencies -- has yet to run its course.

Resuming a trend that began a few weeks ago, the yen posted sharp gains against three of the highest-yielding currencies -- sterling, New Zealand and Australian dollars.

"Most people are just headless and panicking and don't know what they want to do," said Axel Merk, portfolio manager, at Merk Hard Currency Fund in Palo Alto, California.

Merk noted that the current carry unwinding is far from over and that the market will experience more volatility as investors pare back some risk in their leveraged portfolios.

"As volatility in the market ramps up ... there's probably going to be a run on the yen that will push it to new highs."

The dollar was down 1.2 percent against the yen at 116.25 yen in late trading.

The yen's gains coincided with falls in the U.S. stock market. The Dow Jones industrial average <.DJI> fell more than 200 points in its second-biggest sell-off of the year, as mounting losses in the subprime mortgage sector weighed down shares of companies exposed to the U.S. housing market.
In addition, comments from Asian Development Bank President Haruhiko Kuroda warning that a real-scale unwinding of yen carry trades is yet to come, also prompted investors to buy more yen. For more, see [ID:nL13128469].

Against the Swiss franc, another currency with low interest rates, the dollar fell 0.6 percent to 1.2176 francs . The euro slid 1.2 versus the yen to 153.35 yen , moving further away from February's record high near 160.
Sterling also dropped, falling 1.2 percent to 224.55 yen , while the New Zealand dollar, the currency with the highest interest rate in the developed world, plunged more than 2.4 percent to 80.08 . The Australian dollar also plummeted, down 1.7 percent to 90.81 yen .
"The number wasn't really a bad one. Nevertheless this reiterates problems in the subprime market and if there is news that comes out, investors become nervous," said Ken Landon, global currency strategist, at JP Morgan Chase in New York.

For more about the subprime mortgage meltdown, click on [nN07265694].
Tuesday's price action was also fueled by weaker-than-expected U.S. economic data, as well as falling Treasury debt yields.
Retail sales grew in February, the U.S. government said, but not as much as economists had forecast. [ID:nN12367437]. The report fueled a modest sell-off in the dollar.

Late in New York, the euro was flat at $1.3194 .
Concerns about a rising number of defaults in the U.S. subprime mortgage sector and their potential impact on the economy have weighed on U.S. equities and Treasury yields -- in turn triggering buying of yen and Swiss francs.

For the past several weeks, the yen has been closely tied to moves in global equity indexes: weak stocks have meant a stronger yen and vice versa.

(Additional reporting by Kevin Plumberg)

© Reuters 2007. All Rights Reserved

 

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