Yen slips in newfound calm while sterling climbs after jobs data

The yen slipped for a second day on Tuesday as calmer trading conditions prevailed before U.S. inflation data, while the pound rose after figures showed the British unemployment rate unexpectedly fell in June.

Currency markets have been rocked by a sharp rally in the yen since July that has prompted – and been driven by – an unwinding of a highly popular investment strategy called the carry trade and contributed to a slide in stocks.

Yet the dollar rose 0.1% against the yen on Tuesday to 147.34, a second straight rise, in a sign that markets appear to be over the worst of the recent turbulence.

“The general feeling is that there is still life in this in this carry trade, that perhaps the moves against the backdrop of the deterioration in U.S. data have been excessive, and certainly fears of a U.S. recession are overblown,” said Kamal Sharma, senior G10 FX strategist at Bank of America.

The yen slid to 38-year lows in July as investors piled into the carry trade, where they borrow yen in Japan where interest rates are low, then sell it for other currencies to buy higher yielding assets elsewhere.

A number of factors, particularly a surprise rate hike by the Bank of Japan and expectations of U.S. rate cuts due to a slowing labour market, have combined to reverse the carry trade stampede, leaving the yen up around 8% since mid-July.

Government sources told Reuters that Japan’s parliament plans to hold a special session on Aug. 23 to discuss the central bank’s decision last month to raise interest rates.

Investors on Tuesday were waiting for U.S. producer price index (PPI) inflation data later in the day, before the more closely watched consumer price inflation numbers on Wednesday. Both will help guide Federal Reserve interest rate policy.

The dollar index was little changed at 103.13 as investors waited for the figures, with the euro flat at $1.0929. Sharma said investors may not be as focused on the U.S. consumer inflation data, which is expected to show a relatively soft 0.2% rise in prices in July, because concerns about the labour market now seem to be driving markets.

POUND PERKS UP

Sterling was up 0.18% at $1.2789 after data showed the UK’s jobless rate fell to 4.2% in June from 4.4% in May, defying economists’ expectations of a slight rise. Job vacancies declined while wage growth slowed.

Low survey response rates have recently caused investors and economists to put less weight on Britain’s labour market data.

“The overall message from today’s report is that the jobs market is still cooling – declining vacancies are the main symptom of this,” said Francesco Pesole, currency strategist at ING.

“But there is probably enough to keep the Bank of England generally cautious on rate cuts.”

In other currencies, the Aussie dollar rose 0.14% to $0.6595. The dollar rose 0.23% against the Swiss franc , another currency that has rallied recently as investors have unwound carry trades.

(Reporting by Harry Robertson in London; Additional reporting by Wayne Cole in Singapore; Editing by Sam Holmes, Sharon Singleton and Susan Fenton)