By Satomi Noguchi
TOKYO, Jan 18 (Reuters) - The dollar rebounded against the
yen on Friday as Tokyo stocks erased earlier losses to edge
higher, prompting investors to trim their bets that the Japanese
currency will rise further due to an unwinding of carry trades.
The Nikkei share average <> initially plunged as much as
3 percent to two-year lows, tracking sharp losses on Wall Street
on Thursday on growing fears of a U.S. recession.
A strong rebound in the benchmark shares helped investors to
recover their risk tolerance, which had been hurt earlier in the
session and driven the yen to a four-month high against the euro
as investors rushed to exit risky carry trades.
In carry trades, market players use low-yielding currencies
such as the yen to finance purchases of assets offering higher
returns elsewhere. Those trades are vulnerable when stock markets
fall and market volatility rises as they deteriorate investor
risk appetite.
"The rebound of the stock market is the big factor for the
yen's retreat this session," said Etsuko Yamashita, chief
economist at Sumitomo Mitsui Bank.
"Also, market players are broadening their attention to
weakness in the yen as well as the euro after selling the dollar
sharply for some time."
The dollar was at 107.10 yen <JPY=>, up 0.25 percent from
late New York trade on Thursday, rebounding from a day's low of
106.35 yen hit earlier in the session on electronic trading
platform EBS. Demand from Japanese importers also helped the
dollar to stay above a 2-1/2-year low of 105.92 yen hit on
Wednesday.
The euro rose 0.2 percent to 156.75 yen <EURJPY=R> after
falling to a four-month low of 155.69 yen earlier in the session.
POLICY ACTION IN FOCUS
In testimony before the House of Representatives' Budget
Committee on Thursday, the Fed chief repeated a bleak assessment
of the U.S. economy's health that he gave last week.
Investors took Bernanke's comments as a signal that the U.S.
central bank is willing to cut the benchmark federal funds rate
aggressively from the current 4.25 percent this month.
In the testimony, Bernanke also backed the idea that the
struggling economy needs rescue while President George W. Bush
urged a quick and temporary fiscal package, and that led some
investors wonder about a possibility of an inter-meeting rate
cut.
"Bernanke stressed that the fiscal stimulus measure needs to
be designed to kick in quickly. I took his words that the Fed may
also take action quickly to restore market confidence," said a
senior portfolio manager at a Japanese trust bank.
The manager said he thinks the U.S. stocks could rebound
temporarily if the White House and the Fed move together to
announce policy actions, and help sentiment for the dollar.
Interest rate futures had already fully priced in a
half-percentage point cut from the Fed at its regular policy
meeting on Jan. 29-30, and saw a 50-50 chance of an even broader
75 basis point cut.
The euro was steady on the day at $1.4640 <EUR=>, off a
two-week low of $1.4589 hit the previous session.
The euro tumbled this week after European Central Bank
Governing Council member Yves Mersch told Bloomberg News on
Wednesday he did not rule out a downward revision of euro zone
growth forecasts for 2008, fuelling fears that U.S. economic
weakness may be spreading to Europe.
"Mersch's comments continue to cast a shadow over the euro as
the possibility of an ECB rate cut was not priced in by the
market before the remarks," said a trader at a big Japanese bank.
"It will take time for the currency to start rising again,"
he said.
(Additional reporting by Rika Otsuka)
