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Monday June 25, 2007 - 10:51:21 GMT
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FOREX NEWS-Yen rebounds as profit-taking knocks carry trades

FOREX-Yen rebounds as profit-taking knocks carry trades
Mon Jun 25, 2007 6:15 AM ET

(Recasts, changes byline, updates prices, adds quotes)

By Jamie McGeever

LONDON, June 25 (Reuters) - The yen rebounded against major currencies on Monday following comments from the Bank for International Settlements over the weekend on the yen's recent weakness and as traders sought to reduce risk exposure.

The ultra low-yielding yen last week sank to multi-year lows against a range of higher-yielding currencies -- including a record low against the euro -- but dealers on Monday decided to take profits on these over-extended positions.

The BIS said in its annual report on Sunday that the yen's recent slide was "anomalous," and called for continued increases in interest rates around the world as global economic growth powers ahead.

This, coupled with renewed concerns about the U.S. subprime mortgage market and potential spillover to the broader economy and other assets, weighed on stocks and supported safer haven assets on Monday like government bonds and the yen.

The dollar, meanwhile, was mixed against its major counterparts as traders awaited U.S. housing market data and the Federal Reserve's interest rate decision and statement later in the week.

"It's a combination of things," said Laura Ambroseno, currency strategist at Morgan Stanley, of the yen's rebound.

"There's a bit of concern about credit markets in the U.S. and riskier assets, a bit of the BIS, and concern that some of the other low-yielders funding the carry trades like the Swiss franc and Swedish crown are starting to come under (upward) pressure recently as well."

At 0955 GMT the dollar was down 0.3 percent on the day at 123.41 yen , coming back off Friday's peak of 124.16 yen -- the highest since December 2002.

The euro slid 0.4 percent to 166.10 yen , having reached an all-time high of 166.94 yen the previous session.

The yen was also up at least 0.2 percent on the day against sterling, the Swiss franc and the Australian and New Zealand dollars.

EYES ON FED, US DATA

The euro was a touch weaker against the dollar at $1.3457 , while sterling popped above the $2 mark for the first time in almost two months.

The comparatively high-yielding New Zealand dollar recovered all the losses it incurred on suspected central bank intervention late on Friday, striking a 22-year high against the dollar and climbing near a 20-year peak against the yen.

The kiwi's ability to hold up despite falling equities and the yen's recovery suggests there's still some appetite for carry trades, where investors borrow in low-yielding currencies to fund purchases of higher-return units.

But with authorities in Switzerland, and also Taiwan, seeming to take action to tighten credit and limit the use of their currencies to fund carry trades, funding currencies are recovering some ground.

The spectre of a hawkish Fed on Thursday, even if it keeps rates on hold at 5.25 percent as most analysts expect, might spell trouble for the dollar.

"Inflation has come down and there are indications of rebounding growth especially in the manufacturing sector," BNP Paribas currency strategists wrote in a note to clients.

"The combination of lower inflation and stronger growth is normally currency supportive, but with equity markets showing signs of stress, the risk is that a too hawkish Fed statement might add to equity market selling interest."

Data at 1400 GMT on Monday is expected to show a slight decline in existing U.S. home sales in May, the third consecutive month of decline.

© 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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