High yielders, euro rally in London

The euro and high-yielding currencies rallied against the US dollar on Friday while the low-yielding yen weakened broadly, as investors rediscovered their appetite for so-called carry trades. Thursday's relatively neutral statement from the Federal Reserve as it kept interest rates at 5.25 percent strengthened the belief the Fed will be on hold for some time.
This helped depress implied volatility on currency options, a prerequisite for putting on carry trades of selling low-yielding units for assets offering higher returns.
The euro vaulted above $1.35 for the first time in three weeks, the Canadian, Australian and New Zealand dollars hit their highest levels in decades and the yen slid across the board. "Interest rate differentials continue to drive the market," said Laura Ambroseno, currency strategist at Morgan Stanley.
Nick Parsons, head of market strategy at NABCapital, said: "What we are seeing is a huge appetite for the Commonwealth currencies, led by the Canadian dollar, with the Aussie in second place and kiwi in third. We are back to chasing yield and growth."
At 1155 GMT the euro was up 0.4 percent versus the dollar at $1.3500, and up 0.6 percent versus the yen at 166.57 yen. The New Zealand dollar was up 0.4 percent at $0.7720, having hit $0.7740, its highest since the 1985 float, and the Australian dollar hit a fresh 18-high of $0.8521 before paring gains to $0.8500.
The greenback was down half a percent versus the Canadian dollar at C$1.0540, having hit a 30-year low of C$1.0475. The dollar was up 0.2 percent against the yen at 123.39 yen.
Traders said trading related to month-end, quarter-end and first-half end book squaring may have exaggerated price swings. The perkiness of the Australian and New Zealand currencies and the euro stood in contrast to the yen's continued weakness, a difference highlighted by the gaping relative interest rate differentials.
Tame Japanese inflation and manufacturing data overnight overshadowed stronger employment figures, which did nothing to strengthen investors' bets on the Bank of Japan raising rates from 0.5 percent. May US inflation figures as measured by core personal consumption expenditures later in the day will be watched closely for clues on the Fed outlook and implications for risk appetite in currency and other financial markets.