FOREX-Yen extends losses on late U.S. stocks rally
(Recasts, updates prices, adds comment)
By Steven C. Johnson
NEW YORK, Aug 20 (Reuters) - The yen fell broadly on Monday as stocks staged a late afternoon rally and investors cautiously waded back into risky trades after last week's surprise cut in the Federal Reserve's discount lending rate.
The move reversed some of last week's yen rally, sparked by mounting losses on U.S. mortgage debt that dulled investors' risk appetite and prompted an unwind in carry trades that involved borrowing yen cheaply to buy higher-yielding assets.
"There's been a greater sense of calm today and there is some tentative interest to reestablish short yen positions," said Nick Bennenbroek, chief FX strategist at Wells Fargo in New York.
But he said the jury's still out on whether the Fed's attempt to stimulate lending will succeed or fail to loosen up the credit market, and that was keeping investor risk-taking in check.
"People are still wondering about the effectiveness of the Fed's actions," he said. "That's still the big question mark."
In recent trade, the dollar was up 0.5 percent at 114.93 yen <JPY=>, off a session low of 113.69 yen. The euro was also up 0.5 percent at 154.92 yen <EURJPY=> and up 0.1 percent at $1.3483.
The Australian dollar <AUD=>, a favored high-yielding target of carry traders, put in its best day in seven weeks, rising more than 1 percent to $0.8093.
The Fed on Friday cut the discount rate it charges on direct loans to banks by half a percentage point to 5.75 percent, saying credit market tightening could slow U.S. growth.
The move halted a global sell-off in stocks, a rally in government bonds and the rush to dump high-yielding currencies in favor of the yen.
It also got Wall Street gearing up for the Fed to cut by year end its benchmark federal funds rate, which it has held at 5.25 percent since June 2006.
High-yield "currencies are probably off to the races again, as the Japanese won't raise rates rapidly and the Fed is going to have to cut rates," said Monty Guild, principal of Guild Investment Management in Los Angeles.
Bennenbroek said investors remain wary of a sharp carry unwind and in the absence of U.S. data are looking to equity markets for their cue.
By late afternoon, all three major U.S. stock indexes had recovered earlier losses, with the Dow Jones (.DJI: Quote, Profile, Research) and Nasdaq (.IXIC: Quote, Profile, Research) back in positive territory on the day.
That was seen by some investors as a green light to wade cautiously back into some riskier trades. But analysts said the danger was far from over.
"I believe what the Fed did last Friday was just a symbolic gesture," said Joe Francomano, vice president of foreign exchange at Erste Bank in New York.
"Markets are still skeptical of equities and carry trades in general and they will be looking to buy back the yen and sell high-yielding currencies once this euphoria about the Fed wanes."
(Additional reporting by Gertrude Chavez-Dreyfuss)