Yen hits new low vs euro after G7, rebounds

TOKYO, Apr 16 (Reuters) The yen hit a record low against the euro on Monday as Group of Seven finance officials did not single out the Japanese currency's weakness at a weekend meeting, before trimming its losses as investors took profits on the drop.

The G7 repeated its call for exchange rates to reflect economic fundamentals, and cited China again by name in calling for greater currency flexibility, using the exact same wording in its communique as after its February meeting in Germany.

Traders said the lack of surprises from the G7 Washington meeting appeared to give a green light to carry trades, in which investors borrow funds in low-yielding currencies such as the yen to invest in higher-yielding currencies and assets.

European officials seemed to have softened their complaints about the weak yen after this meeting compared with the last gathering in February, when some warned about markets building up one-sided bets in carry trades, analysts said.

''The market's reaction to sell the yen is natural as players saw the G7 as allowing the euro to strengthen further against the yen and the dollar due to the strong euro zone economy,'' said Nobuo Ibaraki, a deputy general manager at Nomura Trust and Banking.

The euro was up 0.2 percent at 161.71 yen after easing back from a 162.43 yen record high since the single currency was launched in 1999.

The single currency gave up some of its gains on profit taking by Japanese investors after it repeatedly scaled all-time peaks over the past week, traders said.

Still, although risks are building for one-sided bets, the yen remains pressured against other currencies for now due to expectations of more carry trades, Ibaraki said.

The dollar rose to its highest since late February of 119.72 yen before briefly dipping below 119.00 yen. The U.S. currency traded around 119.35 yen, up 0.1 percent.

The euro edged up to a two-year high around $1.3575 compared with $1.3530 and was approaching the all-time high of $1.3670 struck in December 2004.

The New Zealand dollar, which has the highest interest rate among industrialised countries, hit a two-year high around $0.7410 before slipping to $0.7377.

The Australian dollar hit a 10-year high of 99.90 against the yen earlier in the session.

Some traders said if government officials keep quiet about post-G7 market reaction, there may be more room for the euro to climb versus the yen while European players could start their day by also dumping the dollar against the single currency.

JAPAN ECONOMY IN FOCUS Although the G7 communique did not make any note of the recent yen weakness, some traders said the market should pay more attention to comments about Japan's good fundamentals.

''Yen selling may be justified as yield differentials won't narrow swiftly. But risks are growing from one-sided bets as the current trend may shift when players realise Japan's economy is solid relative to the uncertain U.S. economy,'' said Takeshi Iba, head of the forex desk at Calyon bank in Tokyo.

Ibaraki at Nomura Trust and Banking said investors should watch for any signs of euro zone growth slowdown or speculation that the Bank of Japan may speed up monetary tightening, which could spur yen buying and rapid unwinding of carry trades.

Against the euro, some analysts cautioned that the single currency has already reached a psychologically important level around 162.40/50 yen, equivalent to the German mark's peak in October 1998 when adjusted by the euro conversion rate.

''From here on, there is no real target, and that should weigh heavily on investor psychology when they try to push the euro higher against the yen,'' said Mitsuru Yaguchi, a senior economist at Mitsubishi UFJ Securities.

U.S. Treasury Secretary Henry Paulson said Japanese officials ''were quite confident that Japan's economy was on a sustainable path of recovery,'' a message unchanged from the February G7.

''Japan's recovery is on track and expected to continue. We remain confident that the implications of these developments will be recognised by market participants and will be incorporated in their assessments of risks,'' the G7 communique said.

REUTERS SR HT1222