Yen gains, sterling falls

The yen gained and the pound fell on Monday as cautious investors continued to shun risk and trimmed exposures to currencies with high interest rates ahead of a slew of US data this week.
Drops in German and US Treasury bond yields on concerns about the US subprime mortgage sector fuelled additional weakness in the dollar and strength in the low-yielding yen and Swiss franc.
The dollar, meanwhile, gave up its gains from Friday when solid US employment data revived carry trades, in which investors borrow cheaply in currencies with low interest rates such as the yen and invest in higher-yielding units such as the British pound and New Zealand dollar. "The biggest mover was sterling/yen, falling three big figures before recovering," said David Powell, currency strategist at IDEAglobal in New York.
"The sell-off in sterling/yen underlines the risk of being tied up in the yen carry trade," he added, although he noted that markets may have seen the worst of the past few weeks' carry unwinding. Powell does not believe the dollar will fall below 116 against the yen.
Many of the carry transactions unraveled a few weeks ago amid a range of factors, including a surge in defaults in the US subprime mortgage market, growing nervousness about a possible confrontation between the United States and Iran, and an interest rate hike from the Bank of Japan a few weeks earlier.
The dollar fell to an intraday low of around 117.23 yen before paring losses to 117.64 yen, still down 0.5 percent from late on Friday. Sterling has retraced some of its losses against the yen to trade at 227.34, down 0.6 percent, as traders took profits in the Japanese currency at around 226 yen. Earlier, sterling/yen fell as low as 225.87. Losses in sterling/yen also spurred falls in the British pound against the dollar, which by early afternoon was flat at $1.9325.
HVB Bank's head of corporate FX sales, Tom Barbour, said market players had taken some profits on some of these carry unwinding trades during the session and "that's why we have seen dollar/yen and sterling/yen come off their lows."
The euro was slightly up against the yen at 155.22. The dollar dropped 0.9 percent against the Swiss franc to 1.2238 francs and the euro slipped 0.3 percent to 1.6147 Swiss francs. The dollar's gain following relatively strong US non-farm payrolls that report last Friday was unable to create sufficient momentum for the greenback on Monday. Investors continued to worry about recent volatile conditions where global stocks tumbled and the yen rallied sharply.
Furthermore, problems in the US high-risk mortgage market pushed up Treasury prices and took some yield support away from both the dollar and the euro. Against the dollar, the euro rose 0.6 percent to $1.3191. Buying of the euros vs the dollar by global macro funds late in the session fuelled further gains in the currency pair, traders said. The euro, however, has remained within a trading range of roughly $1.33 to $1.2865.
While investors were focused on the global risk environment in the last few weeks, a bunch of US economic data due this week should remind investors that fundamentals are just as important as interest rate differentials. Investors will be looking at US retail sales and inflation data, which, if significantly outside of expectations, could coax the market back to looking at economic growth prospects.