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Thursday April 19, 2007 - 09:37:01 GMT
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FOREX NEWS-Yen rises, investors lighten carry amid China jitters

FOREX-Yen rises, investors lighten carry amid China jitters
Thu Apr 19, 2007 4:45am ET137

(Recasts, Changes dateline, byline)

By Veronica Brown

LONDON, April 19 (Reuters) - The yen rose sharply against the euro and dollar on Thursday as worries about a near-term Chinese rate hike to cool rampant growth, falling stocks and strong Japanese data led investors to unload some carry trade positions.

Chinese first-quarter growth and March inflation data came in above forecast, reflecting continued red-hot growth. China's economy grew 11.1 percent in the first quarter.

However, comments from China's national statistics bureau that excess liquidity was still a problem and that the economy risked overheating kept investors on alert for a rise in Chinese borrowing costs, supporting the yen which is often seen as a proxy for China's yuan currency.

The yen's fightback against high-yielding currencies, pulled the euro and sterling off recent highs against the dollar, but the greenback was still weighed broadly by expectations for U.S. interest rate cuts.

"Carry trades are premised on benign financial market positions, when you get a 4.5 percent fall in Shanghai equity markets and S&P futures are off, people are fearful of a volatile day for equity markets," ING head of FX strategy Chris Turner said.

"There's been a pretty strong correlation between dollar/yen and the S&P recently. People are using this as an excuse to de-leverage, or reduce the scale of their carry trades."

On stocks, Tokyo's Nikkei <.N225> dropped 1.67 percent, while the pan-European FTSEurofirst 300 index <.FTEU3> fell more than 1 percent.

Turner said market conditions were reminiscent of those in February when investors heavily reversed carry trades, where low-yielding currencies like the yen are borrowed to fund higher return assets.

By 0840 GMT, the euro was down 0.7 percent on the day at 160.14 yen -- having dropped more than one percent before the Chinese data was released -- and moving away from this week's record high of 162.42.

Japan's tertiary sector index of service industry activity rose 1.0 percent in February from January, against a forecast for a 0.4 percent fall.

The Reuters Tankan, a monthly survey of leading Japanese companies, showed that non-manufacturers' business sentiment in April improved to a nearly three-year high.

The yen briefly fell after Japanese vice finance minister for international affairs Hiroshi Watanabe said the Japanese currency was not too weak just now.


The dollar dropped 0.7 percent to 117.76 yen . Sterling kept the upper hand against the greenback despite carry trade selling, staying up 0.25 percent on the day and near 26-year peaks hit on Wednesday above $2.01.

The euro hit a two-year high of $1.3619 before retreating slightly to $1.3575.

The Australian dollar slid more than 1 percent to 98.14 yen , down sharply from a decade-high above 100 yen hit earlier this week, as investors locked in profits.

Data showing rising U.S. home foreclosures and falling mortgage applications raised concerns that housing sector woes could hurt the economy, reinforcing views that the Federal Reserve would cut interest rates later this year.

Housing figures followed tame consumer prices data earlier in the week which helped ease inflation concerns.

In contrast to sluggish U.S. data, growth prospects are solid and inflationary pressure remains high in other countries, with major central banks such as the Bank of England and the European Central Bank seen boosting interest rates in coming months.

"The market is solely focused on interest rates and this trend will not change any time soon," said a senior trader at a Tokyo-based European bank.

© Reuters 2007. All Rights Reserved.


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