Yen rebounds against global currencies

LONDON - THE yen strengthened against the euro yesterday on speculation that swings in global equity, bond and currency markets will deter investors from resuming so-called carry trades.

The Japanese unit advanced against 14 of the 16 most active currencies yesterday, including the US dollar and sterling.

The yen rose to 152.70 against the euro at 9.27am in London (5.27pm in Singapore), from 153.08 on Tuesday in New York. Japan's currency also climbed to 116.40 per US dollar from 116.60 on Tuesday.

Japan's Nikkei 225 Stock Average closed 0.5 per cent lower, and the benchmark FTSE 100 Index of British shares fell as much as 0.5 per cent in early trading yesterday before erasing its losses.

'The markets are jittery,' said Mr Seiichiro Muta, the director of foreign exchange at UBS in Tokyo. 'The retreat in Japanese shares is scaring some investors into becoming risk-averse.'

Japan's currency has gained 4 per cent against the euro since Feb 27, when a rout in global equities prompted traders to sell riskier holdings and repay yen-denominated loans used to fund their investments.

'Investors have taken a 50 per cent hit on their carry trades, so they won't rush back into it,' said Mr Peter Pontikis, a treasury strategist at Suncorp-Metway in Australia. The yen may climb to 115 against the US dollar by the end of March, he said.

Fluctuations in the yen have also increased, adding to the risk of losses on bets against the currency.

Concerns about the health of the United States economy - and specifically its sub-prime mortgage market - plus geopolitical jitters and a sharp sell-off in Chinese equities at the start of last week have made investors less willing to take risks.

In foreign exchange, this has lead to an unwinding of carry trades in which people borrow low-yielding currencies such as the yen or Swiss franc to fund purchases of higher-return assets.

The potential risk is that returns are wiped out by the appreciation of the funding currency, and thus investors are unwilling to hold such trades in times of high volatility.

'Investors are going to be a lot more nervous about investing in carry trades,' said Mr Mitul Kotecha, the head of global currency strategy at Calyon in London. 'The big change we've seen in the last week is that we're no longer in the environment of the one-way bet. In the short term, we're going to see more yen strength.'

The yen may weaken as global stock markets begin to recover.

The currency fell the most in more than two years against the euro on Tuesday, as share prices rebounded around the world.

'As the market stabilises, the bias will be for speculators to rebuild carry trades,' said Ms Danica Hampton, a currency strategist at Bank of New Zealand. 'This will keep a softer tone to the yen.'

The Bank of Japan's 0.5 per cent borrowing rate is the lowest of any major economy.

Before the sell-off in equities, the popularity of the carry trade last month pushed the yen to a record low against the euro, the weakest in almost 10 years versus the Australian dollar and the least since 1992 against sterling.

But in the short term, the greenback may weaken on speculation that a US report tomorrow will show employers hired 95,000 workers last month, the fewest in two years, according to a Bloomberg survey of 77 economists.

'Investors will probably sell the dollar in anticipation of softer data,' said Mr Nobuaki Tani, senior currency dealer at Resona Bank in Tokyo. 'Concerns over downside risks to the American economy haven't disappeared. The Fed may cut rates.'

BLOOMBERG NEWS, REUTERS