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Yen carried to record low vs euro, dlr weakens

LONDON - Flourishing carry trades took the yen to a lifetime low against the euro on Tuesday while the dollar fell towards last week’s two-year low versus the single currency, reversing gains sparked by a robust US jobs report.

As European traders returned from the long Easter weekend, they pushed the dollar down across the board, with some taking cues from rising US-China trade tensions and caution ahead of this weekend’s meeting of Group of Seven finance chiefs.

Analysts said that investors were fully on board with carry trades, in which low-yielding currencies such as the yen or Swiss franc are borrowed to fund purchases of higher-return assets.

The US currency also weakened against high-yielding currencies, hitting a 16-year low versus the Australian dollar and two-year troughs against the New Zealand dollar.

“While we still have the higher-yielders looking strong, it tends to suggest that appetite for the carry trade is likely to remain in place and that will be a factor keeping the yen and Swiss franc under pressure,” said BNP Paribas senior currency strategist Ian Stannard. By 1140 GMT, the euro hit a record high of 160.03 yen. It also hit a lifetime peak of 1.6391 Swiss francs.

The euro was up 0.46 percent on the day at $1.3412 after hitting a two-year peak of $1.3441 last week. The dollar was down 0.1 percent at 119.21 yen, off last week’s six-week high of 119.38.

The Australian dollar rose as high as US$0.8250, its highest since 1990, while the New Zealand dollar hit a two-year high of US$0.7278.

Bubbling tension

The dollar had gained after data on Friday showed the US economy added 180,000 jobs last month, well above forecasts.

But analysts say dollar negatives stemmed from brewing trade tensions, after Washington said it would take legal action against China for failing to stop widespread piracy and counterfeiting of American goods.

China denounced the decision on Tuesday, saying the action would seriously damage the two countries’ established cooperation.

UBS strategists said in a note to clients that the trade tensions were an ongoing concern for the dollar, but they did not expect a sustained market impact.

“With US rate markets having substantially reduced their assessment of the odds of near-term Fed easing after the jobs report, and with stable equity markets and lower crude prices signalling reduced risk aversion, the dollar should be able to trade well against the lower-yielding currencies in the near-term,” UBS said.

Investors were also cautious ahead of the G7 meeting this weekend in Washington. G7 officials in the past have said yen weakness runs counter to Japan’s economic recovery and warned investors they could be burned making one-way currency bets.

A senior Japanese finance ministry official said some G7 officials may mention the yen at the meeting but the issue will not be a key focus of the talks. A German finance ministry official said the G7 would discuss FX policy but no big surprises were expected.

The yen has been under pressure as Japanese interest rates are set to stay low for some time. The Bank of Japan left interest rates steady at 0.5 percent on Tuesday.

BOJ Governor Toshihiko Fukui said the bank will adjust interest rates gradually in line with the economy and prices.

The European Central Bank also holds a monetary policy meeting this week. The ECB is expected to leave rates on hold at 3.75 percent on Thursday, before raising them again this year, perhaps in June.