Yen, dollar remain friendless; euro, Aussie shine

SYDNEY (Reuters) – The yen stayed on the backfoot early in Asia on Monday, while the dollar struggled against other currencies as investors continued to pile on carry trades in favor of higher-yielding assets.

In a further positive sign for global growth and risk trades, China reported exports and imports both stronger than expected in March, with little sign of any impact from the Japanese quake.

All of which helped the Australian dollar to fresh 29-year highs of $1.0585, while the euro extended to 15-month highs around $1.4488, paving the way for a test of $1.4582, the Jan 2010 high.

Indeed, latest data showed speculators abandoned bets in favor of the yen in the week to April 5, shorting the Japanese currency by the biggest margin in nearly a year, while building up a record long position in the Australian dollar.

“Asian central banks have been extremely active, and with oil prices moving higher once again, we expect further fx reserve diversification to push EUR yet higher. The break of 1.4375 now opens up the way for a move to our target of 1.4500,” BNP Paribas analysts wrote in a note.

They said the preference for using the yen and dollar as funding currencies will probably continue until oil prices hit a tipping point, where the de facto tax on oil-consuming nations forces a downgrade to growth expectations.

“This could be sufficient to prompt a major correction in equity prices and a broader ‘risk-off’ episode that sees funds flow back to the dollar and the reserve accumulation process stopped in its tracks if oil prices then fall sharply.”

Last Friday, Brent crude hit 32-month highs near $127 a barrel, while U.S. crude rose above $113 a barrel for the first time since September 2008.

The euro was last at $1.4462, having gained some 7 cents from the March low, gathering momentum after ECB President Jean-Claude Trichet first hinted at an April rate hike.

The ECB duly raised rates by 25 basis points at its April meeting last week and signaled it was ready to tighten further if needed to check rising prices.

“We now expect euro area inflation to reach 2.8 percent in May, and continue to expect the ECB to hike again in July,” said Luca Ricci, head of international economic research at Barclays Capital.

A Reuters survey also showed analysts generally expect another rate hike in July.

In contrast, both the Federal Reserve and Bank of Japan are expected to keep interest rates near zero for an extended period of time.

Janet Yellen, Fed Vice Chair, said on Saturday the U.S. economy is still not strong enough for the Fed to start reversing its extremely accommodative monetary policy.

The BOJ, meanwhile, has expressed its willingness to ease further if necessary following last month’s devastating earthquake and tsunami. This has made the yen the funding currency of choice.

The dollar recently hit six-month highs around 85.54 yen and was last trading at 85.03. The euro stood at 123.01 yen, having reached an 11-month peak at 123.09 on Friday.

News the U.S. Democrats and opposition Republicans agreed to a budget compromise that averted a government shutdown late last week was seen marginally positive for the dollar, which came under some pressure on Friday.

(Editing by Wayne Cole)

Yen, dollar remain friendless; euro, Aussie shine