Yen rally fizzles out in Tokyo trade

The yen's three-day rally fizzled on Thursday as a rebound in US stocks eased concerns about fallout from problems in the US subprime mortgage sector, prompting investors to again sell the yen in carry trades. The Nikkei share average was up 0.57 percent on Thursday after US stocks rallied the previous day, showing that investor risk appetite is reviving.
The Australian and New Zealand dollars jumped against the yen as investors resumed carry trades, in which low-yielding currencies are borrowed to buy higher-yielding currencies and assets.
"High-yielding currencies rose against the yen following an overnight rise in US stocks, indicating that the yen carry trade is making a comeback," said Kosuke Hanao, head of forex sales at HSBC in Tokyo.
Still, market players are not yet convinced that possible adverse effects of subprime mortgage woes on financial markets will be limited, Hanao said. "So, market participants will remain nervous for a while."
The dollar rose 0.1 percent from late US trading to 122.95 yen staying above a two-week low of 122.23 yen hit in the previous session on electronic trading platform EBS.
The Japanese currency had been picking up from a 4-1/2-year low against the dollar this week on unwinding of carry trades sparked by worries that the US subprime loan problems could start to hurt the broader economy. The euro was up nearly 0.20 percent at 165.45 yen edging back towards an all-time high of 166.94 yen hit last week.
The single European currency was little changed from late New York trade at $1.3455 The higher-yielding New Zealand dollar gained the most against the yen, rising 0.7 percent to 94.00 yen crawling back towards a 20-year high hit late la massive global equities sell-off in late February, which prompted market players to unwind risky yen carry trades and caused the yen to shoot up, the Japanese currency has been sensitive to signs of a waning appetite for risk among investors.
Weaker-than-expected data also weighed on the yen. Japan's industrial production fell 0.4 percent in May from a month earlier, against market expectations for a 0.8 percent rise.
"Yen buying by foreign players may reverse course if stocks in the US continue to rebound," said Tohru Sasaki, chief currency strategist at J. P Morgan Chase Bank in Tokyo.
Market players were also on edge after Japanese Finance Minister Koji Omi warned on Tuesday that markets should be aware of the risks of one-way bets, an apparent reference to carry trades funded in the low-yielding yen.
But traders said the Ministry of Finance was unlikely to conduct yen-buying intervention, and in the absence of that any warnings by Japanese authorities would lose their effectiveness.
Federal Reserve policy-makers will end their meeting on Thursday, and investors widely expect them to leave the key interest rate at the current 5.25 percent and maintain their stand of curbing elevated inflationary pressures.