Hunt for yield lifts euro to fresh peak vs yen

LONDON - The euro hit a record peak against the yen for the fourth time in a week on Wednesday as the hunt for yield dominated sentiment, while dollar watchers awaited data that could give further insight on the direction of interest rates.

By (Reuters)

Published: Wed 3 Jan 2007, 5:25 PM

Last updated: Sat 4 Apr 2015, 9:56 PM

Carry plays, using low-yielding currencies such as the yen to fund purchases of units with more attractive interest rates, were the major factor behind the euro’s pulse higher, analysts said.

‘What we’re seeing on euro/yen is pretty much a continuation of the themes from the end of last year -- the theme of carry is still very much in place,’ BNP Paribas senior currency strategist Ian Stannard said.

By 0851 GMT, the euro had hit a record peak of 158 according to Reuters data, with technical analysts looking for the pair to break 160/161 yen in coming weeks.

The single European currency was a touch lower on the day against the dollar at $1.3262, having hit a peak of $1.3290 earlier.

It also rose to 1.6141 Swiss francs -- the strongest level in almost seven years.

The number of unemployed people in Germany fell by a much bigger than expected 108,000 in seasonally adjusted terms in December, Federal Labour Office figures showed.

The dollar firmed against the yen due to pressure from the euro on the Japanese currency, rising 0.2 percent to 119.14 yen , with a holiday in Tokyo keeping liquidity thin.

Fomc minutes, US data due

Looking ahead, minutes from the US Federal Reserve’s latest rate-setting meeting were seen casting light on current thinking for the rate outlook, with analysts widely expecting that the next move in US borrowing costs will be a cut.

Fed officials have been talking tough on inflation even as the market wagered on rate cuts and dollar bears will be looking for any hint of a softer tone.

The Institute for Supply Management’s December reading on the US manufacturing sector is also due, while Friday brings the non-farm payrolls report for December.

A reading below 50 in the ISM index, which dipped below the boom-or-bust level for the first time in three-and-a-half years in November, would reinforce concerns about an economic slowdown.

‘The ISM is going to be really key at this stage. Last month it dipped below 50 -- the market seems to be expecting it to bounce back but we’re quite sceptical. A print below 50 will put the dollar back under pressure,’ BNP’s Stannard said.

Other US data due on Wednesday includes the ADP December employment report, often seen as a precursor to Friday’s payrolls data.

Carry still king

Sterling and the Australian dollar benefited alongside the euro, extending recent gains as carry trades targeting high-yielders dominated activity.

‘Arguably the market enters 2007 very long the carry trade, with risk appetite strong and little incentive to fight the low volatility rallies in many high yielding currencies. We are not brave enough to recommend going against the carry trade just yet,’ ING analyst Chris Turner said in a note to clients.

The European Central Bank is expected to raise borrowing costs to 3.75 percent in coming months from the current 3.5. By contrast, the next move on US interest rates is likely to be a cut from 5.25 percent after a steady policy in recent months.

Japanese rates are seen rising at a very gradual pace from 0.25 percent -- maintaining the euro’s yield advantage.

The Australian dollar firmed to $0.7983, its strongest level since March 2005. A move above $0.7989 would take the Aussie dollar to its highest since Feb. 2004. It rose to 94.86 yen, its highest in more than nine years.

Sterling hit a one-month high of $1.9751, with talk of another rise in British interest rates to 5.25 percent early this year helping it outperform in recent months. The pound also set an eight-year peak 234.77.