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Anxious investors closely monitoring rising value of yen

The yen gathered momentum on Friday with anxious investors closely watching the Japanese currency, at the heart of this week's financial market turmoil.

The US dollar fell to ?116.79 at 10pm GMT, from ?117.53 on Thursday.

The euro meanwhile rose to US$1.3191 from US$1.3184 late in New York on Thursday. The euro stood at ?154.10, down from ?154.99.

The US dollar lost ground against the New Taiwan dollar in Taipei yesterday, decreasing NT$0.055 to close at NT$32.863.

A total of US$195 million changed hands during the day's trading. The US currency opened at the day's high of NT$32.918 and closed at the day's low of NT$32.860.

Analysts said the yen was seen as a key to this past week's stock market turmoil, because its low value and rock-bottom interest rates have made it source of borrowing by hedge funds and others looking for higher-yielding investments elsewhere. This is known in markets as the "carry trade."

If the yen keeps rising, this could force more traders to pay back their yen loans and possibly create further turbulence.

"The yen is trading at an 11-week high in relation to the dollar on the basis of further `carry trade' unwinding," Hilary Love at PNC Bank said.

The yen is up 3.6 percent this week versus the dollar, and stronger than expected Japanese economic data may mean rising interest rates that would negatively impact the economics of the "carry trade," Love added.

John Kicklighter, currency analyst at Forex Capital Markets, said the dollar was "tossed around Friday as the currency yielded to carry trade flows that have wreaked havoc in the forex market for most of the week."

Kicklighter said the market has become more volatile in recent sessions, with traders forced to pay back yen loans. He said the dollar, which has benefitted from the carry trade, could face more pressure.

"With a 5.25 percent benchmark yield, the US dollar is easily labeled a high yielding currency," he said.

"Furthermore, with the Federal Reserve's next move expected to be a cut later in the year, a broader move towards risk aversion could keep the dollar under pressure."

Data out of Japan was mixed on Friday. Core inflation for January was in line with expectations, while the jobless rate for the same month improved slightly and household spending was well above expectations.

The US dollar gained ground against the euro earlier Friday after the Institute of Supply Management (ISM) said on Thursday that the US manufacturing sector had showed a surprisingly strong gain in February.

Commerzbank analyst Gavin Friend added: "Overall, we expect the dollar to remain on the defensive, but given the data did not confirm the market's worst fears on growth, the recent bout of weakness should stabilize."

The euro was underpinned by expectations that the European Central bank will raise interest rates in the eurozone next week.

In a poll of 30 economists by AFP and financial newswire AFX, experts unanimously predicted a quarter-point hike in eurozone borrowing costs to 3.75 percent next Thursday.

In late New York trading, the US dollar stood at 1.2162 Swiss francs from SF1.2216 on Thursday. The pound was being traded at US$1.9435 after US$1.9580 late on Thursday.
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