Forex dollar rises against the yen on the back of US stocks
12 / May / 22
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The dollar edged higher against the yen on Thursday, supported by modest gains in US stocks and the US Mid-Atlantic Industrial Survey, which showed more positive signs for the economy than the weak bottom line suggested.
Over the past few weeks, the US dollar has moved in tandem with the US stock market, where recent volatility was largely driven by developments in the US subprime mortgage market. On Thursday, investors remained focused on whether the crisis in this sector is spreading to the wider economy.
The broadly positive interpretation of the Philadelphia Federal Reserve survey also helped lift the dollar, confirming the view that the U.S. economy as a whole has turned out to be more resilient than many analysts originally thought.
"There is a general relationship between risk reduction, the yen carry trade and stock prices," said David Greenwald, partner at Scalene Capital, a short-term currency hedge fund in Newport Beach, California.
In a carry trade, investors take out cheap loans to buy high-yielding assets or currencies.
The dollar rose 0.5% to 117.61 yen JPY= . Reflecting the strength of the dollar, US stocks also rose in mid-day trading as financial stocks rebounded from recent losses.
However, stocks tumbled after former Federal Reserve Chairman Alan Greenspan warned on Thursday of risks of contagion in the mortgage market. The dollar also fell off its high against the yen in line with US stocks.
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Speaking to members of the Futures Industry Association in Boca Raton, Florida, Greenspan said it was "difficult to find any evidence" of the expansion of the subprime mortgage market from housing, but added: "You can't take 10 percent of mortgage loans issued without any impact." See Greenspan's paper [ID:nN15449059].
The euro exchange rate remained practically unchanged against the dollar and amounted to 1.3232 US dollars per euro = . The euro gained 0.6% against the yen to hit 155.64 EURJPY= .
Scalene's Greenwald also said that while the Philadelphia Fed's core polling figure came in lower than expected, it was better than the whispered release before the report's release. This helped the dollar strengthen against the yen.
"Any favorable number with moderate gains is good for yen crosses from a carry trade perspective," Greenwald said.
As it turns out, the regional production index fell to 0.2 in March from 0.6 in February, well below market consensus of 4.
The report, however, showed a higher employment index and a stronger price component, indicating enough inflationary pressure in the US economy to at least keep the Fed from cutting interest rates. Learn more about the Philadelphia Fed report
Earlier US wholesale inflation data for February and US capital inflows for January were higher than expected. But traders said it wasn't enough to divert attention away from equity markets for signs of investor risk tolerance.
"Market concerns have now shifted from price data to concerns about the economy," said Matthew Strauss, senior FX strategist at RBC Capital Markets in Toronto.
The dollar was flat against the Swiss franc at 1.2178 CHF= , although it had fallen earlier after the Swiss National Bank raised interest rates and inflation forecasts as expected.
Switzerland, however, has some of the lowest interest rates in the industrialized world, making the Swiss franc a popular currency for financing carry trades.
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