By Eric Burroughs / Reuters
Tokyo: The yen steadied against major currencies on Thursday, 9 August, after sliding the previous day as a rebound in stock and credit markets spurred a revival of carry trades using the low-yielding Japanese currency.
Reassuring comments from the Federal Reserve this week on the outlook for economic growth helped temper fears of a protracted credit squeeze, making investors more comfortable shifting funds back into risky positions.
The yen has been battered the past few years as market players have seized on the currency’s low yields — currently just 0.5% — as a cheap source of funds to buy higher-yielding currencies and risky assets in the carry trade.
The Australian and New Zealand dollars edged up as solid employment data in both countries on Thursday reinforced the outlook for policy rates to stay high at 6.5% and 8.25% respectively, luring yield-hungry investors.
Asian stock markets tracked a third day of solid gains on Wall Street, with Japan’s Nikkei share average climbing over 1%.
“The mini-credit crunch problem needs time to be digested. This is a correction, but it’s not over yet. Equity markets will remain bumpy,” said Kikuko Takeda, a currency strategist at Bank of Tokyo-Mitsubishi UFJ.
Fears about the fallout from rising U.S. subprime mortgage defaults and spreading losses in credit markets have spooked investors in the past few weeks, hurting stocks and prompting a reversal of carry trades.
The dollar was little changed from late US trade near 119.65 yen rebounding from a four-month low of 117.19 yen struck earlier in the week on electronic trading platform EBS.
Traders said the dollar may have trouble overcoming the psychologically important 120 yen level, with Japanese exporters expected to sell into any rise in the US currency as part of their repatriation of overseas earnings before summer holidays.
The euro drifted sideways at 165.10 yen clawing back from a three-month low of 160.47 yen hit last week. The single European currency was steady at $1.3803, not far from an all-time high of $1.3853.
Takeda at BTM-UFJ said Japanese individual investors were still buying higher-yielding foreign assets, and the recent bout of market volatility would only temporarily slow the trend that has played a key role in the yen’s weakness.
“This is a very, very structural and long-lasting trend,” Takeda said. “What will be affected is the pace, not the course.”