Friday June 22, 2007 - 21:15:55 GMT
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FOREX NEWS-Swiss franc surges but carry trades hit yen
FOREX-Swiss franc surges but carry trades hit yen
Fri Jun 22, 2007 4:42 PM ET
By Steven C. Johnson
NEW YORK, June 22 (Reuters) - The Swiss franc surged on Friday on renewed speculation the Swiss National Bank will push official interest rates higher, sparking some concern that central banks may be trying to disrupt yield-seeking carry trades.
But investors hungry for higher returns continued to punish the low-yielding yen, sending it to a four-and-a-half-year low against the dollar and a record trough against the euro.
Euro strength against the yen spilled over as the common currency hit a two-week high against the dollar.
"I think the carry trade is still very much in favor, but there is some concern that the funding leg of these trades is becoming concentrated in the yen," said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto.
Carry trades involve borrowing in a low-yielding currency to buy higher-yielding assets and currencies.
After the yen, the Swiss franc was a favored funding currency for carry trades, but on Friday it hit a 16-year high against the Japanese currency .
The dollar fell 1 percent to 1.2286 Swiss francs after the Swiss central bank let one-week repo rates rise, just a week after lifting the benchmark lending rate to 2.5 percent. The greenback logged its largest daily decline against the franc in four months.
The Swiss government also revised up its growth forecasts for this year and next and its 2008 inflation outlook, leading markets to price in a better than 50/50 chance the SNB will raise benchmark rates a half percentage point in September.
The euro fell 0.45 percent to 1.6550 francs , logging its biggest weekly .
That makes the yen "the focal point for risk-taking," according to Commonwealth Bank currency strategist Divyang Shah, since Japanese policy-makers are not expected to raise interest rates ahead of a July parliamentary election.
The euro hit a lifetime high of 166.94 yen, according to electronic platform EBS, while the dollar rose above 124 yen for the first time since late 2002.
The euro rose half a percent to $1.3464 and was also up half a percent on the week, its biggest weekly gain in almost two months. Markets expect two more euro-zone interest rate hikes in 2007, while the Federal Reserve is expected to stay on hold at 5.25 percent this year.
Sterling and the New Zealand dollar were also beneficiaries of the carry trade, with the former approaching $2 for the first time since late April. Both were at multiyear highs against the yen.
The kiwi rose above US$0.7680 on Friday, the highest level since being floated in 1985, sparking market talk that the central bank could intervene at or above US$0.7700. But by late New York trade the currency had retreated to US$0.7615.
The Reserve Bank of New Zealand entered the market earlier in June to weaken the currency, but interest rates of 8 percent continued to attract money to the market.
"Money is flowing to currencies that have the highest probability of rate hikes. That's been the dominant theme over the past two weeks and it's asserting itself today," said Boris Schlossberg, senior currency strategist at DailyFX.com in New York.
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