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ECB's Trichet says carry trade poses financial risk

European Central Bank President Jean-Claude Trichet said so-called carry trades pose a risk to financial stability, stepping up his warning that investors are underestimating the dangers facing the global economy.

„We want the market to be aware of the risk in one-way bets, in particular on the foreign-exchange markets,” said Trichet at a press conference in Essen, Germany, when asked whether he's concerned about the weaker yen. He was speaking after a meeting of the finance ministers and central bankers of the Group of Seven leading industrialized nations. Japan's currency dropped to a record against the euro last month in part because of the popularity of the trade, where investors borrow at low interest rates in Japan and invest in higher-yielding assets abroad. European ministers pushed the yen onto the meeting's agenda, saying its slide was at odds with the strength of Japan's economy and threatening their exports. „We think of carry trades in general” which are „not appropriate” in current circumstances, said Trichet, in his first explicit warning on the topic. Speaking in Davos, Switzerland, on January 27, Trichet said financial markets `have to be prepared for a reappreciation of risk,” which is „likely.” Trichet yesterday noted that Japanese officials were among those to sign the G-7's statement calling for exchange rates to „reflect economic fundamentals,” suggesting he supports an appreciation in the yen's exchange rate. After remarking that Japan's recovery is „on track,” the G- 7's statement said it's „confident that the implications of these developments will be recognized by market participants and will be incorporated in their assessments of risks.” The G-7 oversees two-thirds of the world economy and is composed of the US, Japan, Germany, UK, France, Canada and Italy. Their officials next convene in Washington in April. (Bloomberg)