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Pick-up in risk appetite bruises yen, dollar flags

LONDON - A rekindling of risk appetite on Tuesday put the yen under pressure against higher-yielding currencies as firmer equity markets prompted investors to move back into carry trades.

The dollar surrendered some of the previous day’s gains to dip back towards a record low against a trade-weighted basket of currencies after its strongest rally in over a year on Monday.

A pick-up in global equities and an easing in credit spreads encouraged fresh carry trades, boosting the Australian and New Zealand dollars as well as sterling, at the expense of the yen.

But with investors fully poised for the Federal Reserve to cut US rates when it meets next week, the room to buy the US dollar against the yen to fund carry trades may be limited.

‘We’re now in an environment where the outlook for interest rate differentials in the dollar/yen cross is beginning to deteriorate and without a solid base in terms of dollar/yen moving higher, that also puts in doubt the general yen carry trade,’ said Derek Halpenny, senior currency economist at BTM-UFJ.

‘Historically, when the differential is less than 4.0 percent, that tends to point to poor performance for the dollar against the yen,’ he said.

By 1038 GMT the dollar was roughly flat at 114.51 yen, above Monday’s six-week low at 113.23 yen.

The euro was up about 0.3 percent at 162.66 yen, while sterling was up about 0.5 percent at 233.60 yen.

European equities markets were on course for their largest one-day rally in a month after a jump on Wall Street and Asian markets overnight.

‘US equities recovered yesterday which has led to a slight return to risk appetite and carry plays,’ said Geoff Kendrick, currency strategist at Westpac. ‘But the market is flip-flopping and the story could turn around as easily today as it did yesterday.’

The euro was up 0.2 percent at $1.4207, while sterling was up 0.5 percent at $2.0407.

The high-yielding Australian dollar was up about 0.7 percent against the greenback while the New Zealand dollar gained 0.5 percent.

The dollar index, which measures its value against a trade-weighted basket of major currencies, was down 0.3 percent at 77.794, up from a record low of 77.093 on Monday.

Investors sold the dollar in Asia on Monday, disappointed that a statement by Group of Seven finance ministers and central bankers at the weekend made no specific mention of the dollar’s recent weakness.

But in later trading on Monday the greenback posted its largest daily gain against the euro since June 2006 as investors concluded that the dollar’s fall may be overdone for now.