November 2, 2007 / 2:29 AM / 12 years ago

Yen trade-weighted index slips in October

TOKYO, Nov 2 (Reuters) - The yen’s real trade-weighted value slipped in October as the Federal Reserve’s interest rate cuts gave a boost to global stock markets and prompted investors to sell the Japanese currency in carry trades.

Bank of Japan data on Friday showed its index of the yen’s real effective exchange rate fell 1.9 percent in October to 96.7 JPYEEXR=J.

The retreat in the BOJ’s REER index took it closer to a 22-year low of 92.8 hit in both June and July, when the currency was sliding as carry trades flourished.

That was the weakest since the September 1985 Plaza Accord in which the five biggest industrialised countries agreed to depreciate the dollar against the German mark and the yen via intervention, aiming to correct the giant U.S. trade deficit at the time.

For the year the yen’s real value has lost 3.6 percent despite periodic bouts of strength as the credit market crunch this year and worries about the U.S. economy prompted market players to unwind risky carry trades.

The yen has suffered in the past few years from carry trades in which investors use the low-yielding Japanese currency as a cheap source of funds to buy higher-yielding currencies or rising assets, such as stocks or commodities.

The U.S. housing market troubles and hits to credit markets have also forced investors to push back expectations for when the Bank of Japan could next lift interest rates from 0.5 percent, with analysts now expecting a hike to 0.75 percent early next year.

This year has been a volatile one for the yen as carry trades have repeatedly fallen in and out of favour along with the risk appetite of investors and performance of stock markets.

The yen jumped on Thursday as a new bout of investor jitters over potential credit losses at U.S. financial institutions drove the Standard & Poor's 500 index .SPX down nearly 3 percent. The yen slipped slightly on Friday to near 114.60 to the dollar JPY=.

When the credit market crunch hit in August, the yen’s REER surged 5.7 percent, the biggest one-month gain for the currency since October 1998, when there was also a massive unwinding of carry trades in the wake of the near collapse of hedge fund Long-Term Capital Management.

The high-yielding New Zealand dollar, long a favourite for carry trades and among Japanese household investors seeking better returns in foreign currencies, tumbled 10 percent against the yen NZDJPY=R in August.

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