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Tuesday June 26, 2007 - 09:17:25 GMT
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FOREX NEWS-Yen rises as carry trades pared after Omi comments

FOREX-Yen rises as carry trades pared after Omi comments
Tue Jun 26, 2007 4:37 AM ET

By Simon Falush

LONDON, June 26 (Reuters) - The yen rose on Tuesday, pulling away from multi-year low versus the dollar and euro hit last week after Japan's finance minister said markets should be aware of the risks of one-way bets against the Japanese currency.

Koji Omi told a news conference that it is important to be aware of the riskes of acting one-way, echoing Group of Seven warnings on one-way currency bets.

Omi's comments follow similar warnings from the Bank for International Settlements in its annual report on Sunday that there was "clearly something anomalous" about the yen's recent weakness.

They also come as investors have fretted about whether monetary authorities in Switzerland and Taiwan are trying to steer the market away from using their currencies to fund carry trades by pushing short-term interest rates higher.

"There has been a change in stance in Japan with recent comments suggesting that the government is concerned with yen weakness," said Ian Stannard, senior foreign exchange strategist at BNP Paribas.

Stannard added that other carry trade funding currencies like the Swiss franc have also benefited from support indicating that investors could be paring back their positions.

The popularity of carry trades -- borrowing funds in low-yielding currencies to buy higher-yielding assets -- has been a driving factor in the yen's broad slide to a 20-year low against the New Zealand dollar and a 15-year trough against the pound.

At 0810 GMT the euro was down 0.4 percent versus the yen at 165.77 , retreating from an all-time low against the European currency. The dollar was down 0.3 percent against the yen at 123.30 .

The dollar was down 0.2 percent versus the euro at $1.3434 and also eased against the Swiss franc to 1.2306 .

It is the second time in the past few weeks that Omi has tweaked his usual comments on currencies at a regular news conference, having started to say earlier this month he was watching the market carefully.

Analysts and traders said the Ministry of Finance was unlikely to conduct any yen-buying intervention, and unless it did so further warnings would probably lose their effectiveness.

"People may take a pause from buying dollars and unwind some long positions," said Yuji Matsuura, joint general manager for Aozora Bank's forex and derivatives trading group.

But Japan's low interest rates will continue to work against the yen, and the dollar is likely to eventually make a try for a rise above 125 yen, Matsuura said.


A drop in Japanese shares also kept the market on edge for any potential rush out of risky positions such as carry trades.

The Nikkei share average <.N225> closed down 0.12 percent, tracking a drop in U.S. stocks on worries about investment bank Bear Stearns bailing out a second hedge fund it manages that invested heavily in subprime mortgages.

The latest concerns about the housing market troubles have pulled benchmark Treasury yields down from a five-year peak struck earlier in the month, removing some of the dollar's relative yield appeal.

Analysts said that these concerns could lead to further dollar weakness. "The difficulties in sub-prime mortgage market and hedge funds running into trouble could impact other asset markets," said BNP Paribas' Stannard. "This could feed through to weaker consumer sentiment and we see the dollar under pressure for now."

Investors will look to U.S. consumer confidence figures for June at 1400 GMT for signs of whether problems in the housing market have fed into the wider economy.

Market players are waiting for Thursday when the Federal Reserve will wrap up a two-day policy meeting for pointers towards Fed thinking about the economy's health.

Signs of a rebound in U.S. growth have many investors expecting the Fed to keep rates steady at 5.25 percent rather than cutting them, helping the dollar recover from a record low against the euro and a 26-year trough versus the pound both hit in April.

© 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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