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Sterling fell against the yen on Tuesday, extending heavy losses from the previous session as concerns about the US housing market continued to prompt waves of risk aversion, with investors backing away from carry trades.
Soft British house price inflation data released overnight fed into bearish sentiment on the pound against the dollar as it showed three interest rate increases since last August had started to bite.
By contrast, stronger than expected British trade numbers provided only a temporary boost, before carry trade unwinding was re-established. Risk aversion returned to markets due to concern about the number of defaults in the subprime mortgage sector and their potential impact on the economy.
Such worries have weighed on equity markets and triggered heavy buying of the yen as investors shunned risk. For more about the subprime mortgage meltdown. The pound had been one of the main beneficiaries of carry trades, where investors borrowed cheaply in yen and ploughed the proceeds into higher-return assets. It has been one of the currencies that has sold off most sharply as investors unwind those positions to curb risk appetite.
"Sterling/yen has been under pressure with risk aversion, we saw big falls in dollar/yen as well. From here things could go either way - if risk aversion does pick back up again, we could see another big leg down," HBOS currency strategist Naeem Wahid said.
By 1522 GMT, sterling had fallen 0.4 percent to 226.39 yen. It was down 0.1 percent at $1.9346 and steady versus the euro at 68.22 pence. British house price growth eased in February to its weakest pace in nine months, with data from the Royal Institution of Chartered Surveyors showing its house price balance fell to 24.0 in the three months to February from 28.0 in the three months to January.
Wahid said the reaction to the housing market data was fairly sanguine, leaving expectations for one more Bank of England rate hike from the current 5.25 percent intact. "If you look at short sterling...we are still pricing in close to one rate hike at the moment and that has not changed too much today."

Copyright Reuters, 2007

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