High-yielding currencies came back into favour and the yen fell on Friday on news that President George W. Bush would announce proposals later on Friday to help US homeowners at risk of default. The yen had clawed back ground earlier this week as continuing problems in the high-risk subprime mortgage sector pushed investors towards safe haven trades and away from higher-yielding assets.
Market participants were also awaiting a speech by Federal Reserve Chairman Ben Bernanke on housing and monetary policy at 1400 GMT for clues on whether the central bank could cut benchmark interest rates soon. The Fed cut the discount rate earlier this month to cool a crisis in the financial system sparked by problems in the subprime sector.
"There is some reaction to Bush's plans to help out people who are in trouble with their mortgage payments and markets are also expecting some comments from Bernanke this afternoon regarding rate cuts. Both these factors are helping the carry trade," said Carsten Fritsch, currency strategist at Commerzbank Corporates & Markets in Frankfurt. In the carry trade investors borrow low yielding currencies like the yen to fund investments in higher yielding assets.
The dollar rose half a percent to 116.32 yen by 1108 GMT, and the euro rallied three quarters of a percent to 159.24 yen. The dollar is trading nearly five yen above 14-month lows struck two weeks ago. The Australian dollar and the New Zealand dollar both added around one percent versus the greenback.
The euro also rose 0.2 percent to $1.3665. There was little market reaction to euro zone data, showing sentiment dipped slightly in August while inflation held steady. Sixty-two of 82 economists polled by Reuters see the European Central Bank leaving rates at 4.0 percent next week in response to a global credit crunch triggered by the subprime crisis.
Tokyo's Nikkei share average climbed more than 2 percent, European bourses gained and US stock index futures were pointing to a stronger open on Wall Street after a senior administration official told Reuters President Bush will outline reforms intended to help homeowners with subprime mortgage avoid default. His statement is scheduled for 1510 GMT. The correlation with global share prices has been a large factor in currency trading in recent weeks, with investors using stocks as a gauge of risk appetite.
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