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Yen rising as investors trim exposure to carry



By Veronica Brown
26 June 2007 @ 06:58 am ET

LONDON - The yen rose broadly on Tuesday, pulling away from multi-year lows versus the dollar and euro after Japanese, South Korean and New Zealand officials raised concerns about the low-yielding currency's recent weakness.

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That, coupled with falls in equity markets and concerns about the impact on the U.S. economy from its housing market injected some wariness into the wisdom of holding riskier carry trades funded by borrowing in the low-yielding yen.

Japanese finance minister Koji Omi told a news conference that it was important to be aware of the risks of acting one way, echoing Group of Seven warnings on one-way currency bets.

Concerns on carry trades were compounded by FX officials from South Korea and New Zealand who agreed they were worried about the adverse impact of the yen's weakness.

On top of that, the International Monetary Fund's chief economist Simon Johnson said building global inflation pressures should provide room for the BOJ to raise interest rates, which in turn would gradually reduce the yen carry trade.

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.

"It's a combination of things really including Japanese officials raising concerns on the yen and a joint statement from South Korea and New Zealand," Calyon head of currency strategy Mitul Kotecha said.

"We're (also) seeing a slight increase in risk aversion...on the back of the hedge fund problem and fallout from subprime mortgages," he said, adding that there seemed to be a bit of a backlash from central banks against carry trades.

"This does point to some further short-term upside for the yen," he added.

By 1015 GMT, the euro was down almost 0.7 percent versus the yen at 165.33, well way from a record high hit last week. The dollar was down 0.6 percent at 122.94.

Copyright 2009 Thomson Reuters. All rights reserved.

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Comments
1.
Jul 24, 2007 11:35am

Hello. Good article. I was wondering whether you think the stronger yen has an impact on the Yen carry trade itself, or whether you need a weaker equities market first, to spur the yen to strengthen. ie: Which one comes first - An equity sell off to cause the yen to rise, or the yen rising against a weak USD and sparking an equity selloff? Thankyou

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