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Yen Sharply Lower as Equities Recover
MarketWatch.com, March 6, 2007
NEW YORK (MarketWatch) -- The yen fell for the first time in four sessions Tuesday, as global stock markets regained ground after the five-day turmoil.
The yen also traded sharply lower against higher-yielding currencies including the British pound, the Australian dollar, the New Zealand dollar, and the South African rand, as pressures on traders to unwind the so-called yen carry trade dissipated. Carry trades refer to the practice of investors borrowing in a low-yielding currency, such as the yen, and reinvesting in higher-return currencies and assets.
"A sense of reason has returned to the [foreign-exchange] market this morning," said Dennis Gartman of The Gartman Letter. "Cooler heads are prevailing for the moment at least, and we shall take that respite and embrace it."
In New York trading, the dollar was quoted at 116.31 yen, compared with 115.86 yen late Monday.
The euro stood at $1.3103, compared with $1.3092.
The British pound traded at $1.9258, compared with $1.9222. The dollar changed hands at 1.2232 Swiss francs, compared with 1.221 francs.
The euro fetched 152.46 yen, compared with 151.70 yen.
U.S. stocks were sharply higher Tuesday, as investors extended a recovery in Asian markets. European stocks also ended higher.
Uncertainty remains
The yen's latest rally started last Tuesday, when it jumped more than 2% against the dollar and euro as greater aversion to investment risk triggered by a big slump in stocks in Shanghai prompted traders to unwind carry trades. It hit a three-month high against the dollar and four-month highs versus the euro and British pound on Monday.
David Watt, senior currency strategist at RBC Capital Markets, said while "fear seems to be dissipating quickly" with global stocks rallying overnight and the yen selling off, "it's too early to conclude" that the turmoil of the past week is over.
"Risk aversion won't abate in a day," he said.
"With market uncertainty running so high, risk aversion, flight to quality and safe haven should remain the dominant trend," said David Brown, an analyst at Bear Stearns, in a note.
Renewed weakness in U.S. data could "trigger fresh selling in world bourses," said Ashraf Laidi, chief foreign-exchange analyst at CMC Markets in New York. The yen could see further gains as another sell-off in equities "could trigger prolonged unwinding of carry trades," he said.
But the worst is probably over, said Brian Dolan, director of research at Forex.com, a division of Gain Capital. "We're starting to see some strong indications that we're getting back to a more regular market."
U.S. data
The dollar fell slightly against the euro after U.S. government reports showed a larger-than-expected drop in demand for U.S.-made manufactured goods and a decline in a gauge of future home buying.
Factory orders dropped 5.6% in January, the largest decline since July 2000, the Commerce Department said Tuesday. Economists were looking for orders to fall about 4.5%, according to the median forecast of economists surveyed by MarketWatch.
Elsewhere, the pending home sales index fell 4.1% in January after a 4.5% rise in December. The index is down 8.9% in the past year. David Lereah, chief economist for the realtors' group, said he detected "an underlying pattern of stabilization in the housing market."
A separate report showing U.S. productivity decelerated in the fourth-quarter while labor costs rose had little impact on the greenback.
Productivity of the U.S. nonfarm business sector rose at a 1.6% annual rate in the fourth quarter, revised down from the 3.0% pace estimated a month ago. Unit labor costs -- a gauge of wage push inflationary pressures -- rose at a 6.6% annual pace in the quarter, revised higher from a 1.7% increase.
Also on Tuesday, the Bank of Canada held its key interest rates unchanged at 4.25%, as widely expected. In an accompanying statement, the central bank said the Canadian and global economies are "evolving broadly in line" with the Bank's expectations as set out in the January Monetary Policy Report. "Despite recent volatility in global financial markets, the Bank continues to judge that the risks to its inflation projection are roughly balanced," the bank said.
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