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Thursday March 29, 2007 - 10:50:12 GMT
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FOREX NEWS-Yen falls as risk aversion abates, U.S. GDP due

FOREX-Yen falls as risk aversion abates, U.S. GDP due
Thu Mar 29, 2007 6:45am ET143

(Updates prices, adds quotes, changes byline)

By Simon Falush

LONDON, March 29 (Reuters) - The yen fell across the board on Thursday while high-yielding currencies outperformed as investors re-entered carry trades after a rise in equity markets and a testimony from Federal Reserve Chairman Ben Bernanke.

Although Bernanke, speaking on Wednesday, acknowledged risks to the economy from the U.S. housing market, he also stressed inflationary pressures -- a message that was taken by markets to mean that the Fed is not ready to cut interest rates yet.

Coupled with a recovery in stock markets, the comments prompted investors to re-enter risky carry trades, borrowing the low-yielding yen to fund purchases of higher return units such as the Australian and New Zealand dollars. This reversed Wednesday's FX market moves.

"It's a benign environment for the carry trade. The market has digested comments from Bernanke and there have been rises in European and Asian stocks," said Kamal Sharma, currency strategist at Bank of America.

European stocks rose on Thursday, while Tokyo's Nikkei index closed broadly flat, erasing earlier losses calming investor nerves about the fragility of the global economy. Oil prices hovered below $64 , after spiking above $68 a barrel earlier this week amid geopolitical tensions over Iran.

The yen fell around half a percent to around 117.45 per dollar and dropped 0.7 percent to 156.69 per euro by 1013 GMT.

The New Zealand dollar -- which enjoys the highest interest rates in the industrialised world at 7.5 percent compared to just 0.5 percent in Japan -- climbed 1 percent to 83.76 yen, erasing part of the previous day's 1.8 percent slide.

The dollar was down 0.2 percent versus the euro at $1.3345 as concern about the health of the world's largest economy put investors on edge ahead of the release of the final estimate of U.S. growth figures for the final months of 2006.

"Investors are looking to the Q4 GDP figures (at 1230 GMT). If growth comes in below expectations we could see further dollar weakness," Sharma said.

BERNANKE'S TESTIMONY

The dollar has suffered from mounting expectations the Fed will cut rates from 5.25 percent, possibly as soon as June, and so erode the currency's yield advantage.

Wednesday's data showing a surprisingly tepid pick-up in U.S. durable goods orders in February helped to compound worries about the health of the U.S. economy as investors look for the Fed to trim rates at least twice before the end of the year.

But Bernanke's speech to Congress was seen as painting a more balanced picture on rates.

"There were soundbites on which both U.S. bulls and bears could hang their hats, though: Bernanke noted clearly the risks to the Fed's central forecast for moderate growth going forward," JP Morgan said in a research note.

"We take Bernanke's remarks to be consistent with a Fed that is on hold near-term."

Investors are looking to speeches by Minneapolis Fed's Gary Stern and Richmond Fed's Jeffrey Lacker.

Fourth quarter U.S. GDP growth, due at 1230 GMT, is seen confirmed at an annualised 2.2 percent.

European Central Bank President Jean-Claude Trichet and Governing Council member Mario Draghi are speaking later.

Rumours of an outbreak of conflict between the United States and Iran, later denied, initially prompted investors to cut back risky positions on Wednesday by selling stocks and unwinding carry trades.

Geopolitical concerns remained at the back of investors' minds on Thursday with Iran still holding 15 British sailors detained at sea last week.

© Reuters 2007. All Rights Reserved.

 

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