Yen softer, risk still buoyed in thin market

SYDNEY Tue Aug 7, 2012 7:32pm EDT

Euro notes are pictured at a bank in this photo illustration taken in Seoul June 18, 2012. REUTERS/Lee Jae-Won

Euro notes are pictured at a bank in this photo illustration taken in Seoul June 18, 2012.

Credit: Reuters/Lee Jae-Won

SYDNEY (Reuters) - The yen started Asian trading on the backfoot on Wednesday, having sagged across the board as investors continued to favor riskier assets on persistent hopes the European Central Bank and Federal Reserve will add more stimulus soon.

The major currencies, though, broke no new ground amid the Northern Hemisphere summer lull and an absence of key economic news. Traders said a move in the U.S. S&P 500 equity index .SPX above 1,400 for the first time since early May was technically positive and a boost to risk sentiment.

The dollar bought 78.66, up from Tuesday's low around 78.16, partly driven by a rise in U.S. Treasury yields, which makes the dollar more attractive relative to the yen.

The euro was at 97.43 yen, having touched a near one-month high of 97.82, while the Australian dollar bought 82.90 yen after hitting a three-month high around 83.23 overnight.

"For now, markets continue to be driven by expectations that a powerful ECB response is looming once the governments come to terms with asking for help," analysts at BNP Paribas wrote in a note, warning currencies remained vulnerable to headline risk amid quiet summer markets.

Investors tend to buy the yen and U.S. dollar in times of heightened market stress, but sell them for higher-yielding currencies when there is appetite for risk.

Comments from the likes of Boston Fed Bank President Eric Rosengren also gave markets hope the U.S. central bank will act soon to bolster the economy, traders said.

Rosengren told the New York Times and CNBC the Fed should start buying Treasury and mortgage-backed securities and continue doing so until the economy was back to full strength.

If that were to occur, the dollar will weaken further as it would become the currency of choice for carry trades. For now though, it held steady against the euro, which bought $1.2392. The euro has risen about 3 percent since July 24.

Investors took a bit of profit in the Australian dollar after it touched a 4-1/2 month high of $1.0604 on Tuesday, shortly after the Reserve Bank of Australia left interest rates unchanged and hinted it was in no hurry to cut rates.

Tuesday's peak for the Aussie also represented the topside of an uptrend channel drawn from early June. It last stood at $1.0548, with immediate support seen around $1.0502, the 23.6 percent retracement of its July 25-Aug 7 rally.

Against sterling, the Aussie ceded a bit of ground, allowing the pound to drift back up to A$1.4799, from a five-month low of A$1.4703.

But traders said sterling could come under renewed pressure if the Bank of England slashes its growth and inflation forecasts later on Wednesday, a move that would bolster expectations for more economic stimulus later this year.

The BOE publishes its inflation report at 0530 EDT.

(Editing by Wayne Cole)

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