Yen Gains as China Implements Reserve Ratio Hike

26 January 2010

LONDON - The yen rose sharply on Tuesday after China’s implementation of rises in some banks’ reserve ratios cut risk appetite and underlined concerns that monetary tightening may slow the country’s economic growth. The dollar fell against the yen but rose against most other currencies after the China news raised the prospect of further tightening. Sterling tumbled against the dollar after data showed Britain only just emerged from recession at the end of 2009, suggesting any UK monetary tightening was still a lomg way off. China’s move sparked selling in positions funded by the low-yielding yen, which hit a nine-month high against the euro, even as ratings agency Standard and Poor’s cut its outlook on Japanese sovereign debt to negative from stable. China’s central bank ordered banks that need to raise their reserve ratios to implement the change on Tuesday, banking sources said, prompting falls in equities.. Analysts said the change, flagged by Chinese officials last week, underlined the market’s low tolerance for risk. “Risk aversion is in vogue right now. The market is still quite skittish about equities, which is coming through and helping the yen,” said HSBC director of currency strategy Paul Mackel. By 1220 GMT, the euro was down more than 1 percent against the Japanese currency at 126.14, yen off an earlier nine-month low of 125.96 yen after Japanese deputy finance minister Yoshihiko Noda pledged fiscal discipline following the S&P announcement. Finance Minister Naoto Kan echoed those comments, saying Japan must show it has a roadmap to restore fiscal health. The yen initially trimmed gains after the S&P announcement, which came in early European trade, but quickly recovered as analysts shrugged off the news on the view that only a small proportion of Japanese government bonds are held offshore. “It would be a very different story if a lot of foreigners held JGBs. It is another reminder that the fiscal side of the story continues to rot in many of the developed economies and I think that’s at the forefront of investors’ minds right now.” Mackel said. The dollar was trading at 89.62 yen, down 0.7 percent, after falling to a one-month low at 89.39 after Noda’s remarks, having earlier traded as high as 90.55 yen. The euro was down 0.5 percent versus the dollar at $1.4075, despite a German survey showing a bigger-than-expected rise, with the Ifo business climate at 95.8 in January, up from 94.7 in December. Quoted from: Khaleejtimes.com