Currency rates stabilised as Yen carry trades strengthen

The yen recovered further ground as equities came well off their highs, with the positive sentiment following the US Federal Reserve's 50 basis point discount rate cut on Friday beginning to wane.

The Japanese currency suffered in the wake of Friday's Fed announcement, coming well off the two and a half month highs reached against the dollar late last week as a measure of risk appetite began to return to the market.

This trend had reversed moderately yesterday, however, with most feeling that the boost to equities and risky assets from the Fed's move, which most have interpreted as a prelude to a cut in interest rates next month, will be short lived.

Trading continues to be jittery, with a great deal of uncertainty remaining as to just how deep-rooted the credit crisis is, the extent to which it will spread to the wider economy and whether central banks can ease the problems significantly.

There is a general lack of conviction in the markets right now, and that will not change until we get to the end of the week, and traders can see whether or not US markets have the resilience to hold in, or whether last week's dent in investor confidence, and the official 10 % correction is something more than that.

Among currencies, the yen as a low-yielding currency has been the main beneficiary of the recent turmoil as a result of the credit crisis as investors rapidly unwound risky carry trades, where money is borrowed in low-yielding currencies in order to invest in higher-yielding assets elsewhere.

Meanwhile, the euro and the pound held onto gains against the dollar garnered on Friday after the Fed discount rate cut, as the US currency had gained support from safe haven flows during the financial turmoil.

The pound was further buoyed yesterday after figures from the Bank of England revealed an unexpected rise in its broad M4 measure of money supply during July, as well as strong public finances data.

There were also solid mortgage lending figures from the British Bankers Association and the Council of Mortgage Lenders, although these were offset slightly by soft numbers from the Building Societies Association.

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