The yen rose to an 11-week high against the dollar on Friday as soft stock prices and
worries about the U.S. economy led investors to keep unwinding bets on risky assets financed by borrowing in the Japanese currency.
The dollar is down 3.5% against the yen this week, on track for its biggest weekly loss in around 14 months.
The yen hit its high for the day after St. Louis Federal Reserve President William Poole said he saw nothing disruptive in carry trades, or bets on high-yielding currencies and other assets financed by borrowing in the currencies of countries with low interest rates like Japan and Switzerland.
Although central bankers like Poole have played down the impact of carry trades this week, even the mention of the word has been enough to get some traders nervous, given the big
shakeout this week.
"Market Is Sensitive"
"It doesn't seem to matter what an official says as the market is sensitive to any mention of carry at the moment," said Jay Meisler, principal of Global-view.com.
Falling global stock markets and worries about the slowdown in the U.S. economy have made investors wary of keeping risky trades on their books and hurt high-yielding currencies such as
the New Zealand dollar and South African rand this week.
Adding to concerns about the health of the U.S. economy, the Reuters/University of Michigan survey on Friday showed that U.S. consumer's confidence in the state of the economy dropped
to its lowest in five months in February.
Analysts said that after the battering high-yielding currencies have taken this week, investors would be reluctant to view the recent shakeout as a buying opportunity until a sense of calm had returned to the market.
"We're seeing a continuation of carry trade unwinding," said Alan Ruskin, chief international strategist at RBS Greenwich Capital. "And I'd say it's still too early to jump back in."
Getting Carried Away?
The yen got some extra support after Japanese data showed an unexpected rise in household spending, snapping 12 straight months of decline, and an unemployment rate that held at 4.0%, the lowest in nearly nine years.
But Japan's widely watched nationwide core consumer price index for January was flat from a year earlier, as expected, showing barely any inflation. That supported expectations that the Bank of Japan will hold rates steady at 0.5% for at least the next six months after last week's hike.
With that in mind, analysts are undecided on whether the latest currency moves will be more than just a correction.
"We still do not believe that current risk aversion would lead to huge unwind of yen carry trades resulting in a significant yen appreciation eventually and believe that recent yen strength has been mainly driven by position squaring by short-term players," JP Morgan said in a research note.