Speculation in a weakening Japanese yen, after losing steam during a recent bout of global stock market turbulence, has picked up and is expected to continue given sharp differences in interest rates between Japan and the rest of the world.The dollar in the past two weeks fell from 120 to 116 yen but is now gaining lost ground, trading at 117.39 yen on Tuesday.The euro, which fell from 159 to 151 yen, was back up to 154.64 on Tuesday."The stock market situation has more or less stabilised," noted economist Danielle Schweisguth of the French research group OFCE.As a result, she said, investors are likely to resume their "carry trade" operations, in which speculators borrow cheap yen that they then invest in lucrative, higher yielding dollar- or euro-based assets.The carry trade was blamed for the slide of the yen to historic lows at the start of the year, a trend that alarmed eurozone authorities who feared their exports would be penalised in competition with Japanese goods on world markets."The interest rate differentials remain attractive and important," said Schweisguth, who added that in the absence of a new "stock market collapse the carry trades should continue."The Bank of Japan on February 21 raised its key rate by a quarter of a point to 0.50 percent. But as deflation remains a risk in Japan, monetary tightening by the central bank is likely to be limited in the short term.The gap with the rest of the world is significant. The European Central Bank has just raised its benchmark rate a quarter of a point to 3.75 percent, with economists foreseeing one or two additional hikes of the same magnitude by the end of the year.In the United States a growth slowdown and fears for the stability of the housing market could prompt the Federal Reserve to lower its benchmark rate by the end of 2007.But at 5.25 percent the current level is largely superior to that in Japan.Smaller countries with relatively high interest rates, such as New Zealand, Turkey and South Africa, are also especially attractive to Japanese investors, retirees in particular."A sustained continuation of the carry trade in the yen is to be expected," said Patrick Arthus of the French investment bank Natixis.But the yen should nonetheless weaken gradually and should not plummet to the depths seen earlier in the year.Economist Schweisguth predicted a floor level of 120 yen for the dollar and 160 for the euro.At the bank HSBC chief economist Mathilde Leomoine said exchange rates should stabilize in the next six months, noting that the stock market upheaval of the last few weeks had sounded an alarm in financial circles.For the pace of activity in carry trades to reach the levels of earlier this year, "there would have to be a return to a trend toward higher interest rates in the United States," she said.
Copyright 2008, by
AFP
. All rights reserved
Arcelor Mittal's bid for Chinese steel maker...
OPEC ministers comfortable with output levels... 