By Gernot Heller and Paul Carrel

ESSEN, Germany (Reuters) - The G7 industrial powers, under pressure to address a decline of the yen, warned investors on Saturday that they could get burned betting in one direction when Japan's economy wa"" >

 
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G7 warns markets against yen-shrinking bets

Sat Feb 10, 2007 1:08PM EST
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By Gernot Heller and Paul Carrel

ESSEN, Germany (Reuters) - The G7 industrial powers, under pressure to address a decline of the yen, warned investors on Saturday that they could get burned betting in one direction when Japan's economy was continuing to strengthen.

The Group of Seven also repeated appeals to China to relax the state grip on the yuan's exchange rate by calling for more currency flexibility and citing the world's fourth-biggest economy by name. And they commissioned a report on hedge funds.

The main innovation at a meeting dominated by currencies and market risk came in a declaration of confidence in the recovery of Japan's economy and warnings from top officials against the carry trade -- an investment play that compounds yen weakness.

In a statement issued after talks in Essen, Germany, the G7 said the U.S. economy was solid and Europe rebounding broadly.

""Japan's recovery is on track and is expected to continue. We are confident that the implications of these developments will be recognized by market participants and will be incorporated in their assessments of risks,"" it said.

The yen recently hit a 21-year low on a trade-weighted basis and has shed four times as much versus the euro in the past year than versus the dollar, sparking concern that European exporters will suffer disproportionately in competition on world markets.

European Central Bank President Jean-Claude Trichet added a layer of warning against the practice of borrowing vast amounts in low-yield currencies such as the yen to reinvest for a profit elsewhere -- carry trades, as they are called.  Continued...

 

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