Dollar mixed as traders mull risk appetite

NEW YORK (AFP) - The dollar was mixed against the other main currencies yesterday as traders tip-toed back into some riskier assets and mulled the implications of the electoral setback for Japan's ruling party.

The euro advanced to 1.3697 dollars at 2100 GMT, compared with 1.3632 dollars late on Friday in New York.

The dollar rose to 119.03 yen from 118.60 yen late on Friday.

After last week's financial market turmoil that prompted a flight to safety and gains in the dollars, traders resumed higher-risk "carry trades" that often involve selling yen for higher-yielding currencies.

"If it were not for the unwinding of the carry trade position and investors reverting back to risk-adverse strategies, the dollar would not have gained much, if any, ground against the euro or sterling at the end of last week," said Jordan Eburne at PNC Bank.

"The same concern still holds true for the US economy: the slumping housing sector and subprime mortgages. This morning's data showed that a gauge of corporate bond risk rose, which has led to speculation that losses on securities backed by subprime mortgages will worsen."

Meanwhile Japanese investors reacted nervously yesterday after the government suffered a voter backlash in weekend polls, raising fears economic reform could stall.

The yen was in focus after a heavy defeat for Prime Minister Shinzo Abe's government in elections Sunday that handed the opposition control of the less powerful upper house of parliament.

"Market talk appears to favor the view that with Japans Upper House election now out of the way, the Bank of Japan (BoJ) will probably resume its monetary policy normalization process when its board next meets on August 23," said Neil Mellor at the Bank of New York Mellon, suggesting a possible rate hike.

"Economic momentum certainly appears to be in place in Japan, at least judging by today's industrial production report and given that BoJ Governor (Toshihiko) Fukui has stated repeatedly that falling prices are not necessarily a barrier to rising interest rates, then there is every possibility that this view will prove prescient."

But Mellor said that nonetheless "interest rates are not going anywhere fast in Japan," suggesting limited upside for the yen against higher-yielding currencies.

In late New York trade, the dollar stood at 1.2028 Swiss francs from 1.2082 lat Friday.

The pound was being traded at 2.0247 dollars after 2.0240.