September 6, 2007 / 8:39 AM / 11 years ago

FOREX-Yen slips as risk appetite edges back

(Changes dateline, byline, updates prices, adds quotes)

By Simon Falush

LONDON, Sept 6 (Reuters) - The yen slipped versus the dollar and euro on Thursday and high yielders strengthened as investors became slightly more comfortable with risky positions ahead of an interest rate decision from the European Central Bank.

Investors have moved back into riskier positions after gains in Asian equities and a higher open on Europe’s bourses.

“Investors are a bit more upbeat as Asian and European stocks firmed meaning that the low yielding yen is under more pressure,” said Kamal Sharma, currency strategist at Bank of America. “Investors seem to be more comfortable with risk, for now.”

Eyes are now turning to the European Central Bank’s interest rate decision. Expectations of a rate hike from the ECB have diminished since a credit market squeeze that has forced the bank to inject liquidity into the banking system. Most analysts now expect rates to be kept on hold at 4 percent.

Investors will look to post-meeting remarks from ECB President Jean-Claude Trichet for further clues on the outlook for rates and how the bank will deal with the ongoing credit market problems.

“The focus will be on the press conference with people looking to see whether it’s likely that the central bank is done hiking altogether,” said Daragh Maher, senior currency strategist at Calyon.”

At 0804 GMT, the dollar was up 0.15 percent to 115.36 yen JPY=. It was steady against the euro at $1.3648 EUR=.

The New Zealand dollar was up 0.7 percent to US$0.6912 NZD= and the pound, which has the highest interest rates in the Group of Seven industrialised nations, hit a 3-1/2 week high at $2.0254 GBP=.

Analysts expect the Bank of England to leave interest rates on hold at 5.75 percent on Thursday.

The reluctance of global banks to lend to each other, partly due to worries about potential exposure to asset-backed commercial paper facilities and U.S. subprime mortgages, has stirred expectations for the Federal Reserve to cut rates.

The ECB on Thursday added temporary funds to the money market in its first emergency liquidity injection in more than three weeks.

CENTRAL BANK MEASURES

The Australian dollar rose 0.4 percent to US$0.8249 AUD= after a report showed employers added 31,900 jobs and the unemployment rate held at a 33-year low. [ID:nSYD14710]

Earlier Australia’s central bank widened the assets that can be used in its money market operations, helping cool a spike in money market yields. [ID:nSYD59852]

The move came a day after the Bank of England raised its reserves target as major central banks struggle to relieve the interbank lending strains.

The dollar took a hit on Wednesday after data showing a sharp plunge in pending home sales in July.

The latest data underscoring the housing market crisis further boosted expectations for the Fed to cut its benchmark federal funds rate by a hefty 50 basis points to 4.75 percent later this month, with a 25 basis point cut already priced in.

The Fed has already pumped extra funds into the banking system and cut its discount rate for direct lending to financial institutions to help relieve the money market squeeze.

Despite the measures taken by the Fed and others, interbank deposit rates such as LIBOR LIBOR for one month and three months remain much higher than usual compared with the overnight policy rates targeted by central banks.

Investors will also look to a number of speeches U.S. policy makers including Federal Reserve Bank of St. Louis President William Poole for guidance on the health of the U.S. economy.

“If the majority of them sound optimistic about the economy and are more concerned about inflation, the market may be disappointed and weak equity markets may support the yen,” said Citi in a note to clients.

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