Yen hovers near record low vs euro

TOKYO, Nov 21: The yen stayed in sight of a record low against the euro on Tuesday, pressured by expectations that the Bank of Japan will raise interest rates only slowly.

The yen weakened broadly on Monday after a weekend meeting of finance ministers and central bankers failed to offer any significant comments on the yen's weakness or on carry trades in the currency. In such trades, investors borrow the yen to buy a higher-yielding currency.

''Volatility in the currency market is low, providing an easy environment for players to do yen carry trades,'' said Masaki Fukui, senior market economist at Mizuho Corporate Bank.

Hedge fund activity was temporarily subdued as many of them close their books in November. But yen carry trade by those players could pick up again into the new business year, Fukui said.

Implied volatility in one-month dollar/yen options is now at the lowest in a decade, while that in one-month euro/yen options is at an all-time low. Implied volatility is a gauge of how much the options market expects volatility in currency movements.

With volatility subdued during the past six momths, carry trades have been profitable to investors and speculators this year.

Demand for foreign assets from Japanese retail investors hungry for higher returns, especially through investment trusts that invest overseas, was expected to keep boosting other currencies against the yen, traders said.

''More foreign currency buying linked to investment trusts is expected as there have been more launches of big investment trusts,'' said Nobuo Ibaraki, forex manager at Nomura Trust and Banking.

By 0300 GMT, the dollar was little changed at 118.05 yen staying in a range slightly wider than 0.2 yen.

The euro were a tad higher at $1.2820

The euro spiked to the day's high of $1.2840 and the U.S. currency darted down to 117.88 yen on selling of the dollar by a big U.S. life insurance company, before the currencies quickly reversed course, traders said. The move was exaggerated in thin trade and caught many off guard, dealers said.

The euro was nearly flat at 151.30 yen in sight of a record high of 151.68 yen hit on electronic trading platform EBS on Monday.

Given a lack of major economic data and ahead of a holiday on Thursday in both Japan and the United States, currencies were expected to move in narrow ranges.

The market will focus on comments from European Central Bank President Jean-Claude Trichet, slated to hold a news conference later in the day.

Trichet said on Monday the ECB has to be strongly vigilant on inflation risks -- the typical signal that interest rates are set to climb -- propping up the euro.

The market expects the ECB to lift interest rates by 25 basis points to 3.50 percent in December and further next year.

The Bank of Japan is also expected to raise the overnight call rate by 25 basis points to 0.5 percent in the January-March quarter.

But the BOJ also has said the pace of its rate tightening would be gradual and investors believe the yen's yield will likely stay below that in other currencies.

Looking for clues on the BOJ board members' stance, the market will be on the alert for the minutes of their Oct. 12-13 policy meeting, to be released at 0500 GMT.

The BOJ raised the overnight call rate to 0.25 percent from zero in July in its first interest rate increase in six years. The central bank has been leaving them on hold since then.

REUTERS