By Masayuki Kitano
TOKYO, Jan 28 (Reuters) - The yen rallied broadly on Monday
as a slide in regional stock markets heightened risk aversion and
crimped demand for higher-yielding currencies and assets.
China's main stock index tumbled more than 7 percent <>,
as heavy snow across central and eastern China stoked worries
about damage to the economy, while Japanese shares fell more than
3.5 percent. []
"It's the familiar pattern of risk aversion caused by falls
in share prices," said Koji Fukaya, senior currency strategist
for Deutsche Securities.
Stock markets remain a driving force for currencies as market
players seek clues on whether to tiptoe back to risky carry
trades, in which the low-yielding yen is used as a source of
cheap funds to buy higher-yielding currencies.
Sterling fell against the yen and the dollar after a senior
Bank of England official said interest rates need to be cut to
prevent a sharp slowdown in British growth.
The dollar fell 0.6 percent to 106.10 yen <JPY=>. The
high-yielding Australian dollar fell 0.8 percent against the yen
<AUDJPY=R> and the New Zealand dollar slumped 0.9 percent versus
the yen <NZDJPY=R>.
The euro fell 0.6 percent to 155.67 yen <EURJPY=R> but was
steady against the dollar at $1.4671 <EUR=>.
Sterling retreated after BoE policymaker David Blanchflower
told the Guardian newspaper in an interview that the central bank
needs to cut rates and stop worrying about inflation.
[]
The remarks helped stoke expectations the BoE will cut rates
by a quarter-point at its policy meeting in February, taking them
down to 5.25 percent and making the pound less alluring for
yield-seeking investors. The BoE made its first rate cut for over
two years in December.
The pound fell to $1.9750 <GBP=>, down 0.4 percent compared
with $1.9820 in late U.S. trade on Friday.
RATE DIFFERENTIALS
The Federal Reserve is also seen cutting rates after a
two-day policy meeting ending on Wednesday by as much as a
half-point following last week's 75-basis-point cut, the biggest
in a quarter-century, in a rare move between scheduled meetings.
Market players are awaiting a slew of data this week for
clues on the U.S. economy's health, including new home sales
figures later in the day and the monthly jobs report on Friday.
While the troubles in the U.S. economy and banking system
have hurt the dollar, investors are also selling currencies like
the pound where interest rates are expected to head lower.
"If the Fed falls short with only a 25-basis point rate cut
or no rate cut, that may badly affect equity markets and put
upward pressure on the yen," said Masafumi Yamamoto, head of FX
strategy for Japan at Royal Bank of Scotland in Tokyo.
A steeper, 50 basis-point rate cut may lend support to U.S.
shares prices and give the dollar some near-term relief against
the yen, but the longer term implications could be negative for
the dollar, said Yuji Matsuura, joint general manager for Aozora
Bank's foreign exchange and derivatives trading group.
"As interest rate differentials will shrink, it will become
harder to sell the yen and easier to sell the dollar," he said.
Even if the Fed cuts interest rates by half a point and that
in turn boosts U.S. stock markets, the dollar will likely
struggle to rise sharply above 110 yen, Matsuura said.
Due to the Fed's rate cut last week, the rate differential
between the U.S. benchmark federal funds rate and Japan's key
overnight call rate has shrunk to 3 percentage points, down from
3.75 percentage points in December.
Events later in the day will feature speeches by a few ECB
officials and President George W. Bush's State of the Union
address.
Bush and congressional leaders have been trying to thrash out
a $150 billion stimulus package to help to limit the economy's
downturn this year from a reeling housing market.
In television interviews at the weekend, U.S. Treasury
Secretary Henry Paulson said the Senate should quickly approve
the stimulus proposal to boost the sagging economy.
(Additional reporting by Eric Burroughs)
