U.S. News

Dollar Rises Against Euro as Yen Rallies Broadly

Reuters
WATCH LIVE

The dollar rose against the euro, and the yen rallied on Wednesday after investors cut exposure to carry trades as losses in the U.S. subprime mortgage market widened.

The yen rallied against most major currencies as investors continued to unwind carry trades in which they funded purchases of higher-yielding assets by borrowing in lower-yielding currencies like the Japanese yen.

In the U.S., foreign exchange markets showed little reaction to government reports on consumer prices and industrial output for July and a U.S. Treasury department release on capital inflows for June. 

"Right now, the unwinding of the carry trade is more important (than economic data)," said Andrew Bekoff, chief investment strategist at Printz Capital Management in Philadelphia. "The overall feeling is that the financial crisis seems to be worsening and is impacting equities and repricing credit and risk."

The yen rose to multi-month highs against the dollar , sterling , the euro , and the Australian and New Zealand dollars.

In midday trading in New York, the dollar was about 0.3 percent lower at 117.27 yen after trading as low as 116.62, according to Reuters data.

The dollar pared some of its losses against the Japanese currency as U.S. stocks advanced in early trade.

The New Zealand dollar was down 1.6 percent at 84.01 yen while the Australian dollar tumbled 1.2 percent to 96.86 yen.

"The yen rising above 117 to the dollar earlier draws a line on the sand for many investors -- it simply makes carry trades unprofitable," said Michael Woolfolk, a senior currency strategist at The Bank of New York Mellon. "High-yielding currencies are having a really hard time against the yen."

Yen gains also resulted in a surge in one-month implied volatility on the Japanese currency's options in another sign carry trades may be exposed to sharper exchange-rate moves.

The euro fell for a third straight day against the greenback in its worst slide in six months at current prices. Investors fretted about European exposure to the U.S. subprime mortgage sector, prompting speculation that the European Central Bank may not lift interest rates next month.

"We are in the middle of a credit market crisis in the U.S., and the truth is that European banks have a lot of exposure to this very same market," said Woolfolk. "The euro and also sterling will keep getting pounded."

Sterling, already reeling from much weaker-than-expected UK inflation data on Tuesday, fell below $1.99 to a low of $1.9857 before recouping some losses to trade at $1.9945, down 0.1 percent.

Government reports earlier on Wednesday showed increases in U.S. consumer prices and industrial output in line with expectations in July.

"If anything, the data is somewhat supportive to the dollar," said Woolfolk. "But there's still a lot of uncertainty regarding the real damage that may be caused by the subprime market. That remains the big question."