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Russian bear-hug squeezes yen higher
By Peter Garnham
Published: October 20 2006 11:40 | Last updated: October 20 2006 17:41
The yen advanced this week after the Russian central bank said it was adding the Japanese
currency to its foreign-exchange reserves.
Alexei Ulyukayev, first deputy chairman of the Russian central bank, told a news conference in
Moscow that Russia had been thinking about broadening the number of currencies in which it was
allowed to invest its assets and that recently it had included the yen.
Analysts said the move was important, not just because Russia’s gold and foreign-exchange
reserves at $268bn were the third-largest in the world, but also because global central banks are
underweight the yen and the move could be the start of a trend that sees other countries follow
Russia’s lead.
The yen was also supported by reports in the Japanese press that suggested the Bank of Japan was set to step up its
monitoring of carry trades.
Nihon Kezai, the Japanese business daily, said the BoJ was concerned that hedge funds and their investors were helping to
push down the Japanese currency by borrowing funds cheaply in yen to invest in higher-yielding assets abroad.
The BoJ later denied it was setting up new monitoring mechanisms. However, analysts said the report served to highlight
Japanese anxieties over the build-up of short yen positions in the market, especially given the events of 1998, when dollar/yen
tumbled from Y130.80 to Y111.80 in two days as hedge funds unwound carry trades in response to the Russian financial crisis.
Tim Fox, , FX strategist at Dresdner Kleinwort, said: “It might be early days to start worrying about an unwinding of the carry
trade. But it is an issue that is at the back of people’s minds.”
Over the week the yen rose 0.9 per cent against the dollar to Y118.70 and 0.1 per cent against the euro to Y149.60.
For its part the dollar eased 0.8 per cent against the euro to $1.2610 on the week as a series of US economic data releases,
including figures on both consumer and producer prices, failed conclusively to end the debate over whether the US economy
was heading for a hard or soft landing.
Adrian Schmidt, , senior forex strategist at Royal Bank of Scotland, said the dollar’s fall might simply have reflected the fact that
the euro/dollar rate came close to the bottom of the ranges seen in the past six months at $1.25 against the euro. He argued
that in the absence of genuine evidence of higher US rates – or some other clear fundamental justification for dollar strength –
some dealers who had built up long dollar positions had sold down their holdings, pushing the currency pair back towards the
centre of its range.
Sterling rose 1.4 per cent against the dollar to $1.8820 and 0.6 per cent against the euro to £0.6700 on the week’s as series of
data releases, including figures on Friday revealing stronger than expected UK growth, which served to heighten market
expectations that the Bank of England would raise UK interest rates by 25 basis points after its November policy-setting
meeting.
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23.10.2006 09:53