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Yen Rises After Greenspan Comments on Carry Trade

The Japanese yen edged up against the dollar and the euro after former Federal Reserve Chairman Alan Greenspan said the yen carry trade at some point has "got to turn."

Greenspan was speaking at a trading technology conference in New York. He also said that the U.S. housing sector wasexperiencing an "inventory recession."

Investors have avoided placing large bets before central bank policy meetings on Thursday and a U.S. payrolls report on Friday.

Traders have curbed their exposure to riskier assets in the past week, prompting a worldwide sell-off in equities markets, on concern about the health of the U.S. economy and its subprime mortgage market as well as global political jitters.

This has led to a rise in the yen with the unwinding of carry trades, in which investors borrow low-yielding currencies to fund purchases of higher-return assets.

"After the big move on the yen, we are seeing some consolidation today, with the currency stalling," said Michael Kaizer, a currency trader at M&T Bank in Buffalo, New York. "On top of that, we have a lot of data and central bank meetings in the next two days. People don't want to make a big commitment without that information."

The dollar was down about 0.4% against the yen. The euro rose slightly versus the yen after posting its biggest weekly loss in 2-1/2 years last week, followed by a bounce back of 1% on Tuesday.

Traders and analysts, however, were split on whether the recent moves were the start of a deeper unwinding of the carry trade or whether investors will return to the strategy once market volatility eases.

One potential risk for carry trades is that returns are wiped out by the appreciation of the funding currency, and thus investors are unwilling to hold such trades in times of high volatility.

The euro fell slightly against the dollar following the European Central Bank's rate rise of 25 basis points to 3.75% on Thursday. The focus will be on the post-decision news conference for clues on how soon rates may move to 4%.

The Bank of England kept rates on hold at 5.25%. Sterling dipped slightly against the dollar on the news.

In the United States, the week's key event is Friday's February nonfarm payrolls report. Signs of a slowing jobs market are likely to boost expectations of Federal Reserve rate cuts late this year.

U.S. private employers likely added 57,000 new jobs in February, according to a survey by ADP Employers Services, released this morning.

Later on Wednesday, the Fed will release its survey of regional economic conditions. The report is due at 2 p.m. New York time.

"The looming event risk in the form of tomorrow's ECB and BoE meetings and Friday's U.S. employment and trade data, may deter significant position-taking today," Brown Brothers
Harriman said in a note to clients.

With most majors stable, the Australian dollar stood out with gains of as much as 0.4% against the U.S. dollar after data showed Australia's economy grew almost twice as fast as expected in the final three months of 2006.

The Reserve Bank of Australia left rates steady at 6.25% earlier today, as was widely expected.

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