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Wednesday April 11, 2007 - 10:20:34 GMT
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FOREX NEWS-Euro hits all-time high vs yen on rate differentials

(corrected) FOREX-Euro hits all-time high vs yen on rate differentials
Wed Apr 11, 2007 5:12am ET161

(Correct 9th paragraph to say Steinbrueck has decided to carry on with his holiday, rather than has decided not to)

By Simon Falush

LONDON, April 11 (Reuters) - The euro hit a record high versus the yen on Wednesday as investor expectations that the single currency's interest rates will continue to rise put Japan's low-yielding currency under broad selling pressure.

The single currency rose to 160.18 yen , the highest level since its launch in 1999. The yen was also hit by a surprise drop in Japanese core machinery orders in February, which cast some doubt on the outlook for capital spending.

The European Central Bank is expected to hold rates steady at 3.75 percent at its meeting this week, but investors expect a rate rise this quarter. All but four of 72 economists polled by Reuters said borrowing costs could rise to 4 percent by June.

Analysts said carrty trades were driving the weakness of the yen, with low-yielding currencies like the yen being borrowed to fund purchases of assets offering a higher return.

"It does look as though the carry trade is being perpetuated," said Jeremy Stretch, market strategist at Rabobank in London.

"The yen is probably going to remain on the back foot broadly. The machinery orders were pretty soft and with the proximity of the G7 meeting I think it will be the yen that will continue to be pressured," he added.

But despite an appetite among Japanese investors to pick up the euro and the dollar at a bargain against the yen, wariness ahead of this weekend's Group of Seven meeting was likely to limit significant gains, some analysts said.

G7 officials have said in the past that yen weakness runs counter to Japan's economic recovery and warned investors they could get burned making one-way currency bets.

Japanese officials said the yen was unlikely to be a key focus of the G7 talks and since German Finance Minister Peer Steinbrueck has decided to carry on with a planned holiday rather than attend, some traders expected no surprises. However others remained wary of possible comments from outside Japan as the meeting approached.

By 0756 GMT, the euro was steady at 160.00 yen, having hit its highest since the launch of the single European currency in 1999.

Versus the dollar, the euro was was broadly steady at $1.3424, off a two-year high of $1.3456 hit on Tuesday .

The dollar was up 0.1 percent against the yen at 119.16 , hovering near a six-week high of 119.39 yen matched on Monday.


The dollar was on the defensive against other currencies after falling broadly on Tuesday due to concerns about the U.S. housing sector and trade tensions with China.

The United States on Tuesday accused China at the World Trade Organisation of illegaly copying goods and blocking access to U.S. films, books and software.

Concerns that a weaker housing market may prompt the Federal Reserve to cut interest rates later in the year also weighed on the dollar, although Dallas Reserve Bank President Richard Fisher said policymakers may have "more work to do" to ensure that inflation does not run too high.

Some traders said this suggested the Fed's next move may not necessarily be a cut. Further insight on where the Fed stands will come with minutes from March 20-21 policy meeting due later on Wednesday.

High-yielding currencies such as the Australian and New Zealand dollars basked in their rate advantages, with the kiwi hitting its highest level in nearly two years, while the Aussie climbed to a 16-1/2-year high on Tuesday.

The Aussie hit a fresh 10-year high around 98.50 yen while the kiwi rose to a 16-month high to the yen.

Sterling edged up against other major currencies, up 0.2 percent against the dollar at $1.9765 on a report in the Financial Times that Britain's Treasury is expected to issue a paper this spring discussing the option of allowing British-based companies to repatriate foreign profits tax-free.

(Additional reporting by Toni Vorobyova)


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