Currencies

Friday May 9, 06:41 AM
Forex - Yen firmer vs dollar in Tokyo early afternoon on stock market weakness

TOKYO (Thomson Financial) - The yen was trading slightly firmer against the U.S. dollar in early afternoon trade in Tokyo on Friday as investors shifted their funds from sluggish stocks to higher-yielding currencies.

'The yen tends to be picked up when stocks decline as investors' risk tolerance decreases. So there is the continuing carry-trade move, although it is not as intensive as it used to be,' said Mitsuru Sahara, senior manager at Bank of Tokyo-Mitsubishi UFJ.

Carry trades refer to the practice by which investors borrow funds in countries such as Japan where the cost of funds is cheap, and reinvest them in high-yielding currencies such as the Australian dollar.

At 1:15 p.m. (0415 GMT) the dollar was trading at 103.52 yen compared to 103.74 yen in Sydney and 103.75 in late trade in New York.

The euro was at $ 1.5408 compared to $1.5401 in Sydney and $1.5394 in New York.

The weakness in the greenback follows a choppy session overnight when the U.S. dollar came under pressure on renewed concerns about the outlook for the U.S. economy, while the euro was supported after the European Central Bank signaled that it had no intention to cut interest rates in the near term.

'Although the worst period of the credit crisis is considered to be over, worries (about the U.S. economy) remain, such as the weak housing market in the U.S.,' Bank of Tokyo-Mitsubishi (Munich: 857124 - news) 's Sahara said.

The ECB overnight left interest rates unchanged at 4.0 percent, with ECB President Jean-Claude Trichet saying inflation rates are expected to 'remain higher over a rather protracted period of time before gradually declining again.'

'The ECB is unlikely to lower rates as it says inflation is its top priority. And it is obvious the bank wants to increase rates. So in the short-term, the euro tends to be bought while the dollar is seen to stay weak as the Fed is unlikely to increase rates,' Sahara said.

'But in the mid- to the long-term view, once the economy recovers to some extent, the U.S. will also need to increase rates as there are inflation risks. Since the U.S. has been aggressively lowering rates thus far, once signs for a rate hike emerge, the dollar may sharply rebound,' he said.

Tokyo 1:15 p.m. (0415 GMT)

U.S. dollar

yen 103.52

Swiss franc 1.0488

Euro

U.S. dollar 1.5408

yen 159.52

Swiss franc 1.6155

pound 0.7877

Pound

U.S. dollar 1.9556

yen 202.45