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Thursday August 9, 2007 - 01:08:13 GMT
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FOREX NEWS-Yen slumps as risk appetite returns, dollar down

FOREX-Yen slumps as risk appetite returns, dollar down
Wed Aug 8, 2007 5:13PM EDT

(Updates prices, adds comment, changes byline)

By Rachel Breitman

NEW YORK, Aug 8 (Reuters) - The yen fell broadly on Wednesday after a Federal Reserve statement tempered fears about the impact of U.S. credit troubles on the wider economy, boosting stocks and other risky assets.

Signs of a recovery in investor appetite for risk, underscored by rising stocks, weighed on the low-yielding yen, a favorite vehicle for carry trades.

In carry trades, investors borrow in low-interest-rate currencies such as the yen so they can invest in assets denominated in higher-yielding currencies such as the Australian dollar.

The dollar declined against other major currencies after Tuesday's Fed statement gave no indication of any near-term interest rate action, contrasting with the European Central Bank and the Bank of England, which have signaled rate rises this year.

"The Fed did a pretty good job of calming the market down a bit yesterday," said Shaun Osborne, chief currency strategist at TD Securities in Toronto. "They didn't show any signs of panic, which has helped equities recover and move us back into carry trades."

In late afternoon New York trading, the dollar was up 0.9 percent against the yen at 119.74 yen <JPY=>, more than 2 yen up from this week's four-month low. The euro was up 1.1 percent against the Japanese currency at 165.16 yen <EURJPY=>.

On Tuesday, the Fed left interest rates on hold at 5.25 percent, as expected, and acknowledged that financial markets have been volatile and credit conditions are becoming tighter for "some households and businesses."

But the statement said that, despite the increase in risks to growth, the U.S. economy was still likely to expand at a moderate pace in coming quarters. That sent stocks higher, U.S. government bonds down, and emerging market spreads tighter.

U.S. Treasury Secretary Henry Paulson also weighed in on the credit market crisis. In an interview with the CNBC financial television channel on Wednesday, Paulson was upbeat, saying "the fundamentals of the economy are very solid." He added that U.S. exports would be "kicking in" to boost economic growth.


U.S. stocks also rose on Wednesday, led by a rally in technology stocks, with investors snapping up battered financial shares as well.

In another sign of improved sentiment, U.S. sales of investment-grade corporate debt revived, with Merrill Lynch (MER.N: Quote, Profile, Research), Citigroup (C.N: Quote, Profile, Research), Kraft Foods (KFT.N: Quote, Profile, Research) and several other companies marketing deals.

"I think that risk appetite is far from dead," said Naomi Fink, director of foreign exchange strategy at BNP Paribas in New York. "We can see that on many different markets, from U.S. corporate debt to equities, (and) emerging market currencies."

Yet, despite more favorable sentiment in financial markets, the dollar index (.DXY: Quote, Profile, Research), a measure of the greenback's value against a basket of six major currencies, fell 0.1 percent, erasing most of the gains made in the previous session.

The euro rose 0.4 percent against the dollar to $1.3792 <EUR=>, less than half a cent below a record high hit in July.

Analysts said the dollar will likely continue to lose its interest rate advantage in coming months, with the ECB having already signaled a rate increase in September.

Sterling was up 0.7 percent at $2.0358 against the dollar <GBP=> after a quarterly report from the Bank of England suggested UK interest rates may have to rise more to combat inflation. The Australian dollar <AUD=> also rose, up 0.8 percent against the U.S. dollar at US$0.8613 after the Reserve Bank of Australia raised rates a quarter point to 6.5 percent.

(Additional reporting by Gertrude Chavez-Dreyfuss and David McMahon)

© Reuters 2006. 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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