Yen Still Smells Of Roses. By Nicholas Hastings

Once again, it is time to support the yen.

Despite clear signs last month that the Japanese currency will come under selling pressure if, and when, investors focus on yields, there is little sign of this happening yet.

In fact, developments over the last few days suggest that currencies continue to be driven largely by risk and that, as a safe haven, the yen will continue to benefit.

See how the yen has held up against the dollar:



A measure of just how resilient the Japanese currency remains in the face of disappointing news on the Japanese economy came on Thursday when one of the main credit agencies, Fitch, warned that the country's sovereign rating is at risk because of rising government debt.

This comes as the ruling DPJ party in Tokyo increases pressure on the Bank of Japan to stimulate the economy with more monetary easing.

Nevertheless, the yen took the Fitch warning in its stride, failing to even fall back to its low for the day against the dollar when the headline came out.

The yen may also get help from expectations that the Bank of Japan will upgrade its outlook for the economy as well as recent data showing a solid recovery in exports.

However, its resilience probably had a lot more to do with events elsewhere rather than any new found hopes for the Japanese recovery.

Although hopes for the global economy have risen in recent weeks, this has coincided with a steady deterioration in investor confidence that Greece will avoid debt default.

As negotiations with the European Union and the International Monetary Fund got underway in Greece this week, financial markets have been focusing on the risk that Greece won't get funds quickly enough to keep up its debt repayments.

This has brought fears of contagion with Greek bond yields rising even more sharply above those on offer from Germany. But, of even more concern, has been the widening in spreads for Portuguese and Spanish yields--raising the borrowing costs for these countries and increasing the risk that they too will face problems servicing their debts.

The impact this is having on investor sentiment was brought home Thursday when Ashai Life, Japan's seventh largest life insurer, said that it wants to increase the weighting of Japanese government bonds relative to its euro-zone bonds because of the widening spreads.

Meanwhile, the yen could also find itself getting additional support from China, as the markets speculate not only over a further tightening of monetary policy but also an appreciation in the yuan by Beijing.

The former will only increase pressure on global investors to withdraw back into safe havens, such as the yen, while the latter could be seen as a plus for the Japanese, and other Asian, economies that have to compete with China.

This week both India and Brazil joined the U.S. in pressing China to release the yuan from its current dollar peg sooner rather than later now that strong Chinese growth is so well established.

For the moment, the yen remains in favor, especially as concerns over Greece's debt problems keep investors reluctant to add to risk. The market is looking to see if a meeting of finance ministers from the Group of 20 industrial and developing nations taking place in Washington DC this weekend produces any short-term solutions to help Greece from defaulting.

By 0653 GMT, the dollar was down at Y93.42 from Y93.56 late on Thursday in New York, according to EBS. The euro was also down at Y123.58 from Y124.52. The single currency was also down at $1.3230 from $1.3311.