By Harry Robertson
LONDON (Reuters) – The yen weakened for a second straight day on Tuesday on calmer market conditions ahead of U.S. inflation data, while the pound rose after data showed Britain’s unemployment rate unexpectedly fell in June.
Currency markets have been rocked by the yen’s pointed rise since July, which has led to the collapse of a hugely popular investment strategy called the carry trade and contributed to falling stock prices.
But the dollar rose 0.1% against the yen on Tuesday to 147.34, its second straight gain and a signal that markets appear to be putting the worst of the recent turmoil behind them.
“The general feeling is that there is still some survival in this carry trade, that the moves on the back of the worsening US data were overblown and that fears of a US recession are certainly overblown,” said Kamal Sharma, senior G10 currency strategist at Bank of America.
The yen fell to a 38-year low in July as investors turned to carry trades, which involve borrowing yen in Japan, where interest rates are low, then selling it for other currencies and buying higher-yielding assets elsewhere.
Several factors, notably an unexpected interest rate hike by the Bank of Japan and expectations of U.S. rate cuts due to a slowdown in the labor market, helped reverse the downward trend in the carry market, with the yen up about 8% since mid-July.
Government sources told Reuters that Japan’s parliament plans to hold a special session on August 23 to discuss the central bank’s decision last month to raise interest rates.
Investors on Tuesday awaited U.S. Producer Price Index (PPI) inflation data later in the day, ahead of the more closely watched consumer price inflation data on Wednesday. Both will aid guide the Federal Reserve’s interest rate policy.
The rate was little changed at 103.13 as investors awaited the data, and the euro remained at $1.0929.
Sharma said investors may not be as focused on U.S. inflation data, which is expected to show a relatively muted 0.2% rise in prices in July, as concerns about the labor market appear to be driving markets at the moment.
THE BENEFITS OF THE POUND ARE RISING
The pound rose 0.18% to $1.2789 after data showed Britain’s unemployment rate fell to 4.2% in June from 4.4% in May, defying economists’ expectations for a petite rise. Job vacancies fell and wage growth slowed.
Low levels of response to surveys have meant that investors and economists have recently placed less importance on UK jobs data.
“The overall message from today’s report is that the labour market continues to cool, with the main symptom of this being the fall in job vacancies,” said Francesco Pesole, currency strategist at ING.
“But there are probably enough reasons for the Bank of England to be generally cautious about cutting interest rates.”
In other currencies, the dollar rose 0.14% to $0.6595. The greenback rose 0.23% against the Swiss franc, another currency that has recently rallied as investors exited carry trades.
