FOREX-Yen extends rebound as China stocks fall
TOKYO, May 30 (Reuters) - The yen extended its rebound on Wednesday from a record low against the euro as investors further cut back risky positions in carry trades after the Chinese stock market tumbled due to a sudden share-trading tax hike.
Shanghai's stock index .SSEC fell more than 6 percent, while Tokyo's Nikkei share average .N225 shed 0.7 percent.
Investors were worried that China's tax hike could hit global equity markets and heighten risk aversion.
Carry trades, in which investors borrow low-yielding currencies such as the Japanese yen to fund purchases of assets offering higher returns, are vulnerable to reduced risk appetite, often prompting a sharp appreciation of the yen when investors reverse such positions.
"The fate of the dollar/yen depends on the performance of Chinese stock today," said a senior trader at a Japanese bank.
"If Chinese stocks fall further, the yen may rise."
The euro fell against the yen and touched the day's low at 163.05 yen before rebounding to 163.40 yen EURJPY=, still 0.1 percent down from late U.S. trading.
The European single currency had reached a fresh record high of 164.29 yen in the previous session as comments by European Central Bank officials suggesting more euro-zone rate increases prompted investors to buy the euro.
The dollar was trading down 0.2 percent at 121.40 yen JPY=, after falling as low as 121.29 yen earlier in the session.
The U.S. currency ticked up against the yen and neared a three-month high after Japan's industrial production figures were below expectations, but quickly fell back as the data did little to alter expectations that the Bank of Japan will raise rates as early as August.
A drop in the unemployment rate and strong household spending data on Tuesday had reinforced such expectations and sent short-term Japanese bond yields to a decade high.
Analysts say that the impact on global equity markets may be short-lived, as it was last week after former Federal Reserve Chairman Alan Greenspan said he feared a dramatic contraction in Chinese stocks.
"While we believe that the announcement may cause a wobble in risk appetite, it is unlikely to significantly derail market trends," currency analysts at Morgan Stanley said in a note to clients.
China authorities are raising the stamp duty on share trades to 0.3 percent from 0.1 percent from Wednesday in an effort to cool speculation in the stock markets.
Japan's industrial production fell 0.1 percent in April from a month earlier, against a consensus market forecast for a 0.5 percent rise. Continued...
