The yen fell against the dollar and euro on Friday after rising Asian and European equities calmed markets, prompting investors to edge back into relatively risky carry trades.
The yen fell in tandem with a rally in Asian shares and European shares were also in positive territory as investors took comfort from a financial package mooted by US President George W. Bush aimed at cushioning the economy from a downturn. In carry trades, market players use low-yielding currencies such as the yen to finance purchases of assets offering higher returns. Those trades are more attractive when stock markets rise, supporting investor risk appetite.
“There was a dollar bounce from the Bush stimulus package, Asian equities rallied and in the near term this should help the dollar,” said Colin Asher, currency strategist at Nomura.
However he noted the longer-term outlook for the US economy remains bleak.
“The flip side of this is that the run up in data has been shocking, I can’t remember the last time the data has been this bad and the continued problems in banks mean that in the medium term the US economy will continue to struggle.”
The dollar rose 0.6% to 107.48 yen. The euro was up 0.4% against the yen at 157.41 yen.
The euro was steady on the day at $1.4649 by 1152 GMT, well off its all-time high just below $1.50 set in November as expectations increased that the European Central Bank may cut rates this year.
“The market is definitely nervous about any risk of the ECB signaling that rates have peaked and that’s keeping us in relatively tight ranges,” said Adam Cole, global head of currency strategy at RBC Capital Markets.
Helping lift some of the gloom surrounding the US economy, Bush’s plan is to introduce tax rebates for families and breaks for businesses that could cost up to $150 billion.
Federal Reserve Chairman Ben Bernanke, in testimony before the House of Representatives’ Budget Committee on Thursday, also backed the idea that the struggling economy needed rescue.
Bernanke had reiterated a bleak assessment of the US economy that he gave last week, which investors saw as a signal that the US central bank was willing to cut the benchmark federal funds rate aggressively from the current 4.25% this month.
Interest rate futures have already fully priced in a half-percentage point cut from the Fed at its regular policy meeting on Jan. 29-30, and saw a 50-50 chance of an even broader 75 basis point cut.
Markets also turned more bearish on the UK economy as weak retail data figures prompted investors to price in a higher probability of imminent rate cuts and sell the pound.
“More people are now starting to price in the possibility of a 50 basis point cut at the February MPC meeting,” said Asher at Nomura, adding that he did not think this was likely. (Reuters)