Yen slips as rallying stocks help stem risk sell-off

By Staff
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LONDON, Mar 6 (Reuters) The yen slipped against the dollar and euro while higher-yielding currencies rebounded on Tuesday as rising equities helped stem a week-long sell-off in risky carry trades.

Over the past week investors have rushed to unwind these trades, funded in the low-yielding yen or Swiss franc, as a decline in global stocks and concerns about the U.S. economy fanned investor risk aversion.

The magnitude of the move, which saw the yen post its biggest weekly percentage gain against the euro since August 2003, has exhausted investors, prompting them to go sideways to assess the climate for risk.

''This is a correction within the correction...It's much more to do with stock markets,'' said Johan Javeus, currency strategist at SEB in Stockholm.

''We still have more downside to euro/yen and dollar/yen in coming weeks. However, since we saw such a very dramatic and rapid fall last week it's only natural it takes a small pause.

Dollar/yen euro/yen are working as a proxy for risk appetite.'' By 0845 GMT, the euro had risen one percent on the day to 152.92 yen.

The rise comes after the unwinding over the past week took the euro all the way down to a 3-1/2 month low of 150.72 yen on Tuesday from its record high near 160 set late in February.

The dollar was up 0.7 percent at 116.46 yen, after hitting a three-month low of 115.13 and posting its biggest weekly fall since December 2005 last week.

Dealers say a jump in sterling against the yen from a five-month low hit earlier in the day sparked a broad rise in higher-yielding currencies against the Japanese unit, driving the Australian and New Zealand dollars up more than 1 percent.

Sterling had been hit particularly hard, suffering its biggest weekly loss last week against the yen since Nov 1999, as it had been one of the biggest beneficiaries from carry trades.

The euro was up 0.2 percent at .3121, after hitting 2-1/2 week lows on Monday.

YEN AND RISK Over the past week the yen saw an inverted correlation with stocks as well as risk aversion.

On Tuesday Tokyo stocks closed 1.22 percent higher, snapping a five-day losing streak, and other equity markets in Asia also bounced back. European shares opened higher, with U.S. stock futures pointing to a higher open on Wall Street.

''The stock market is showing signs of some stability and spurring short covering, which has spilled over to the currency market,'' said Shogo Nagaya, a senior trader at Nomura Securities.

''It's premature to say the markets have bottomed out until we see full-fledged investor buying in both the stock and currency markets, but at least, we feel the worst is over.'' Analysts say the market could remain calm ahead of the next set of data and events which may unsettle it again.

U.S. factory orders and home sales figures are due later, ahead of a closely-watched February jobs report on Friday.

Several monetary policy meetings are also due later in the week. The European Central Bank is expected to raise rates by 25 basis points to 3.75 percent at its meeting on Thursday.

Central banks in Britain, Canada, Australia and New Zealand are also scheduled to hold rate-setting meetings.

REUTERS CS DS1502

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