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Thursday August 23, 2007 - 20:32:29 GMT
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FOREX NEWS-Yen tumbles as traders tip-toe back into carry trade

  FOREX-Yen tumbles as traders tip-toe back into carry trade
Thu Aug 23, 2007 4:24PM EDT

(Updates prices, adds detail)

By Steven C. Johnson

NEW YORK, Aug 23 (Reuters) - The yen fell for the second straight day on Thursday as easing global credit concerns sparked a tentative rebound in trades financed by borrowing at low Japanese interest rates.

But early gains in U.S. stock markets fizzled in afternoon trade after the CEO of top U.S. mortgage lender Countrywide Financial said the struggling housing market could drag the U.S. economy into recession. That renewed fears of further market turmoil and helped the yen recover some earlier losses against the dollar and euro.

"There was never a sense that we were out of the woods, only a sense that a certain amount of risk premium was being put back into the market," said Matthew Kassel, director of foreign exchange at ING Capital Markets in New York.

"Some of that premium was retracted in the last 24 hours. Now a little bit is being put back in."

In late New York trade, the dollar was up about 0.6 percent from late Wednesday at 116.03 yen, though well off its session peak above 117 yen. The euro was up 0.7 percent at 157.35 yen.

Still, the market mood was one of relative calm considering last week's spike in volatility. Analysts said the calm was mostly tied to expectations that the Federal Reserve would cut the benchmark fed funds interest rate target. U.S. rate futures have priced in at least 50 basis points of cuts this year.

"Everything is rosy at the moment with risk aversion declining and investors happy to put money in risky assets and carry trades," said Shaun Osborne, chief currency strategist at TD Securities in Toronto. "All this is predicated on the view that the Fed is going to cut rates this year."

Earlier, the Bank of Japan left interest rates at 0.5 percent, the lowest in the developed world, though Governor Toshihiko Fukui warned rates could not stay low forever.

But that, too, failed to deter market appetite for carry trades, in which investors borrow in a low-yielding currency to invest in assets with higher returns.

The high-yielding Australian dollar climbed about 2.0 percent to 95.24 yen <AUDJPY=R>, its biggest one-day jump in more than three years. The New Zealand dollar rose 1.4 percent. <NZDJPY=R>

Sterling rose 0.6 percent back above $2.00 for the first time in more than a week, exiting North American trade at $2.0050 <GBP=>, while the euro rose 0.1 percent to $1.3560. <EUR=>

The European Central Bank on Thursday injected 40 billion euros of funds via a three-month money market operation, further restoring confidence to the market.

That followed news overnight that Bank of America Corp would invest $2 billion in beleaguered Countrywide Financial Corp.

But there are signs that market jitters persist. On Thursday, Countrywide Chief Executive Angelo Mozilo told CNBC television that the market environment is "certainly not getting better," adding he doesn't know when the housing cycle will turn. That prompted selling of U.S. stocks.

Also, Goldman Sachs said in a research note that various benchmarks show nominal prices for homes could fall 15 percent to 30 percent in the next few years.

"While the worst appears to be over for now at least, there are still a lot of tentative traders out there," said Ron Simpson, director of currency research at Action Economics in Tampa, Florida. "Nobody's really willing to bet the bank on any trend at this point." (Additional reporting by Gertrude Chavez-Dreyfuss)

© 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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