The dollar rose against the yen for a second straight day on Thursday as traders took advantage of a rebound in US blue-chip stocks to adjust positions before Friday's closely-watched payrolls report. The Euro and Sterling traded higher even as the European Central Bank and the Bank of England left rates on hold at 4 percent and 5.75 percent, respectively.
Traders said the respite from the recent sharp swings in financial markets prompted a return to selling low-yielding currencies such as the yen and Swiss franc to buy higher-yielding but riskier assets. Traders said "The trade this week has been simple: if stocks rise, you short the yen, if they fall, you buy back yen; but the payrolls report today may break this pattern, making the Forex Market less dependent on stocks to asses risk."
Yesterday, the Dollar was up 0.24% against the yen at 119.16, recovering from four-month 117.61 lows the previous day. The Euro also rose 0.54% to 163.31.
ECB President Jean-Claude Trichet said after the bank's policy meeting that "strong vigilance" was needed to stem inflation risks, signaling a possible September rate hike. The ECB's Trichet weighed in on the recent volatility in financial markets. He said the central bank was closely monitoring shifts in sentiment and the price movements that were part of a "normalization of pricing risk." Analysts said, his remarks on 'normalization of risk' implies that the current volatility will not affect the ECB's tightening campaign.
The EurUsd hit session highs yesterday around 1.3708 after Bundesbank President Axel Weber said fears of a German banking crisis were unfounded following problems at IKB. In a statement, Weber said problems at IKB, which specializes in lending to small- and mid-sized companies, were of an "institution-specific nature." IKB has become Europe's most high-profile casualty so far of the crisis in the US sub-prime mortgage market. Its problems have fueled concerns that other German banks might be in trouble. "Risk aversion is going to remain high. Because people have lost a lot of money and they're not going to put a lot of risk back into the market," said analyst.
UsdChf was little changed at 1.2034 after having touched 1.2085 high.
Last week's sell-off in the stock market and a slide in corporate bond prices over the past few weeks caused hefty losses for some banks and hedge funds. For currency traders, this has sparked a reversal of risky carry trades where cheap borrowing in the yen is used to fund purchases of high-yielding currencies such as the Australian dollar. The unwinding of carry trades has come in fits and starts, reflecting the market's heightened nervousness about the extent of problems in the U.S. housing and credit sectors.
Yesterday, the high-yielding New Zealand dollar was up 0.69% at 91.48 against the Yen, while the Australian dollar was up 0.84% at 102.23 against the Yen.