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Wednesday March 14, 2007 - 10:21:16 GMT
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FOREX NEWS-Yen holds firm on subprime jitters, sliding stocks NEWS

FOREX-Yen holds firm on subprime jitters, sliding stocks
Wed Mar 14, 2007 5:14am ET148

(changes dateline, byline, adds quotes, updates prices)

By Veronica Brown

LONDON, March 14 (Reuters) - The yen held firm against the dollar and euro on Wednesday, as jittery investors unwound risky carry trades on concerns that turmoil in the U.S. subprime mortgage sector may reverberate in the broader economy.

Sliding world stock markets fed into a fresh leg of risk aversion, fanned by Tuesday's U.S. data showing that late payments on U.S. mortgages hit a 3-1/2-year high in the fourth quarter and rising delinquencies in 49 of 50 states.

The figures, following earlier data indicating surprisingly weak U.S. retail sales in February, rattled investors already nervous about troubles in the U.S. mortgage market and drove the S&P 500 index down 2 percent.

Asian shares suffered as a result, with the Nikkei average <.N225> tumbling 3 percent, while European stocks were down some 2 percent within 10 minutes of markets opening <.FTEU3>.

FX market volatility soared at the front end overnight, with volatility for one-week dollar/yen options hitting its highest since May 2004.

"FX volatility is rising at the front end of the curve, global risk aversion is heightening with concerns about U.S. economic growth and the subprime mortgage market. All of these factors are suggesting a very nervous market," Bank of America currency strategist Kamal Sharma said.

By 0855 GMT, the dollar was down 0.1 percent at 115.97 yen , moving towards the three-month low of 115.13 yen struck last week, having lost more than 1 percent against the yen on Tuesday.

The euro stood at 153.12 yen , while sterling -- one of the more popular carry trades -- was down almost half a percent on the day at 223.10 yen .

The single currency was flat against the dollar at $1.3195 .

Asia-based traders said the dollar had found a slight respite due to buying demand from Japanese importers and investors, as well as speculators covering short positions after the U.S. currency's slide bottomed out.

Carry trades, in which lower-yielding currencies are used to buy higher-yielding currencies and assets, have come under pressure as share prices have taken a hit in the past few weeks.

Analysts were wary of investors continuing to unload such positions if stock markets failed to stabilise.

"Weakness in high-risk assets like equities and emerging markets will mean further upward pressure on low-yielding currencies like the JPY and CHF, while the reverse will apply on any recovery in equities," Mellon Bank head of currency research Ian Gunner said in a note to clients.


Markets were unnerved after two major U.S. subprime lenders Accredited Home Lenders Holding Co. (LEND.O: Quote, Profile , Research) and New Century Financial Corp (NEWC.PK: Quote, Profile , Research) said they were running out of cash on Tuesday. Rising mortgage defaults prompted General Motors Corp. (GM.N: Quote, Profile , Research) to inject $1 billion into its former finance arm, GMAC.

Dollar sentiment also took a hit after data on Tuesday showed that U.S. retail sales rose only 0.1 percent in February, raising concerns that a soft U.S. economy may prompt the Federal Reserve to consider cutting interest rates later this year.

Fears that the U.S. economy may be slowing have been throw into the spotlight by the subprime mortgage market, where a number of the lenders to high-risk borrowers have gone bankrupt due to rising defaults.

Due to recent problems in the U.S. mortgage market, traders will focus on the Mortgage Bankers Association's weekly data on mortgage activity and refinancing at 1100 GMT. Market players are also eyeing U.S. consumer price data later in the week.

© Reuters 2007. All Rights Reserved.


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