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Tuesday June 5, 2007 - 11:05:40 GMT
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FOREX NEWS-Yen plumbs fresh lows, investors hunt for returns

FOREX-Yen plumbs fresh lows, investors hunt for returns
Tue Jun 5, 2007 6:04 AM ET

(Changes byline, adds quotes, updates prices)

By Veronica Brown

LONDON, June 5 (Reuters) - The yen fell to record lows versus the euro and 17-year lows against the New Zealand dollar on Tuesday as investors continued to shun the Japanese unit in favour of higher-yielding currencies.

With the focus on interest rate differentials, the euro ticked up to a one-week high versus the dollar, boosted by expectations that the European Central Bank will raise rates to 4 percent on Wednesday and signal more monetary tightening to come.

That would further narrow the yield gap with the United States, where the Federal Reserve is eventually seen cutting rates from the current 5.25 percent, though recent strong U.S. data means the cut may come later rather than sooner.

Growing conviction that the world's largest economy will avoid a hard landing has also boosted investors' risk appetite, fuelling carry trade investments funded by borrowing the low-yielding yen.

"The risk environment, with the sell-off in Chinese equities notwithstanding, has generally been benign. That sort of environment on the equities front has continued to mean that the higher yielding currencies have outperformed," Lehman Brothers G10 currency strategist Phyllis Papadavid said.

By 0930 GMT, the euro was up 0.1 percent on the day at $1.3509, around one-week highs and pulling away from a near two-month low of $1.3391 hit last week.

A robust view of ECB monetary policy was backed by data showing euro area service sector growth rising at a marginally faster rate than expected in May.

The single currency scored a record high versus the yen for a second session in a row at 164.61 yen . The dollar was steady at 121.72 , stopping short of a four month high of 122.14 yen touched late last week.

The yen fell to 15-year lows against sterling and the Australian dollar and 17-year lows versus the New Zealand dollar -- which enjoys the highest interest rates in the industrialised world at 7.75 percent. The kiwi also hit a 22-year post-float high versus the U.S. dollar .

One-month implied volatility in euro/dollar fell to record lows , while Chinese stock markets recovered from earlier steep losses and European bourses opened higher -- all factors supportive of risk appetite.


Bank of Japan Governor Toshihiko Fukui said on Tuesday that the BOJ needs to watch for risk of a sharp unwinding of carry trades.

But analysts say the yen will be in for more losses against higher-yielding currencies even as the BOJ is seen lifting rates as early as in August, given that rates in those countries are also expected to rise sometime in the near future.

"We believe strong global growth and risk appetite will persist in the near term, supporting carry trades," JP Morgan said in a research note.

The Reserve Bank of Australia will make a decision on rates early on Wednesday local time, while the Bank of England and the Reserve Bank of New Zealand will issue policy statements on Thursday.

All three are seen holding rates steady, but market participants expect they will maintain rate-tightening biases.

The heads of the world's top three central banks -- Fed Chairman Ben Bernanke, ECB President Jean-Claude Trichet and BOJ's Fukui -- will discuss "Housing and the Economy" in a satellite discussion later in the day.

Further clues on the strength of the U.S. economy will come from the Institute for Supply Management's non-manufacturing index for May at 1400 GMT.

© 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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