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Thursday May 17, 2007 - 11:03:37 GMT
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FOREX NEWS-Yen falls as carry trade stays in favour

FOREX-Yen falls as carry trade stays in favour
Thu May 17, 2007 6:57 AM ET

(Changes byline adds quotes, updates prices)

By Simon Falush

LONDON, May 17 (Reuters) - The yen fell to a three-month low against the dollar and slid back toward its record trough versus the euro on Thursday, as Japanese growth data did little to dent investor appetite for higher-yielding currencies.

The Bank of Japan, which had the morning to examine the growth figures, ended its two-day policy meeting by leaving interest rates steady at 0.5 percent, as expected.

BOJ Governor Toshihiko Fukui said Japanese rates could be raised even if consumer prices were still falling, but repeated that rates would be adjusted gradually.

Japan's gross domestic product expanded at an annualised 2.4 percent in the first quarter, below expectations for 2.7 percent growth. Solid consumer spending was offset by a surprising fall in capital spending.

While the GDP data was slightly weaker than expected, it still marked the ninth consecutive quarter of growth and backed expectations for Japanese borrowing costs to be lifted later this year. Some analysts, however, said that the data may push back the timing of an increase from current expectations.

Investors, therefore, remain comfortable about selling the yen to fund purchases of higher-yielding currencies and assets in the carry trade, especially as global stock markets are buoyant and volatility subdued.

"Carry is still king, but I think there was quite an important part of GDP data that has been overlooked," said Chris Turner, head of FX strategy at ING.

"Everyone is obsessed with consumer prices and they are down... on the year. This is a pretty difficult environment for an interest rate hike," he said, adding the next rate hike could be pushed back to the first quarter of next year.

By 1030 GMT, the dollar had hit a three-month high of 121.16 yen , while the euro was up 0.3 percent on the day at 163.82 yen -- close to a record peak hit on Wednesday at 163.91 yen .

The euro was trading at $1.3524 , but trade was thinned by a public holiday in some European countries.

The outlook for euro zone growth was supported by comments from European Central Bank Governing Council member Klaus Liebscher in Romania on Thursday, see [nFAT003332].


With U.S. overnight rates at 5.25 percent and euro zone rates seen heading to 4.0 percent or higher this year, the yen has been neglected by yield-hungry investors and Japanese households shifting more funds into overseas stocks and bonds.

High-yielding emerging market currencies are rallying too, with Brazil's real in particular surging. The U.S. dollar fell below 2 reais this week for the first time in over six years.

"There remains some scope for further yen weakness in the short-term (USD-JPY has room up to the Feb high of 121.75). However, this may not be that dramatic and the risk of chasing yen weakness is that reversals will be sharp on any sign of retrenchment in global markets," Mellon Bank head of currency research Ian Gunner said.

In terms of U.S. data, the main focus on Thursday will be the Philadelphia Fed business activity index for May. Economists in a Reuters survey forecast a median reading of 3.0 versus 0.2 in April.

Several Federal Reserve officials are also speaking later on Thursday including Fed Chairman Ben Bernanke, with a speech on sub-prime mortgage markets.

Investors will also scan Canadian inflation data at 1100 GMT. Economists polled by Reuters expect consumer prices to rise 0.3 percent on the month in April, giving an annual increase of 2.1 percent compared with a rise of 2.3 percent in March.

(Additional reporting by Daliah Merzaban)

© Reuters 2007. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world.


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