Yen Rises on Rebound in Tertiary Sector Activity, Korean Won Falls Despite Interest Rate Rise

The yen strengthened against the U.S. dollar on Friday after the Japanese tertiary sector activity rebounded in May. At around 6 am GMT, the greenback lost 0.3% of its value to trade around ¥80.1250 against the Japanese currency. The yen was pushed higher by news of a strong rebound in its tertiary sector. According to METI, Japan's tertiary sector activity rose by 2.6% in May, following a 5.9% fall in April. Analysts were predicting a slightly stronger rebound of 2.7%, however. The tertiary sector activity data follows a string of encouraging data for the Japanese economy. On Thursday, the Japanese economy provided some reassurance to traders as its first quarter growth was revised upwards, even though the upgrade did not change the fact Japan is in a recession. At the same time, Japan's manufacturing sector is on its way to recovery as the machine tool orders were driven higher by strong overseas demand. The Japanese economy is still a long way to full recovery, however, after some parts of Japan were devastated by natural disasters, which also created supply problems for the whole Japanese economy. This gloom was seen in a recent IMF report on Japan, where the IMF stressed its belief that the Japanese economy will shrink in 2011, before rebounding in 2012. Across the Sea of Japan, the Korean central bank took analysts by surprise and raised its interest rates to 3.25% from 3%. The Bank of Korea seems to be agitated, according to BBC, by inflation levels, which have been above the central bank's 2%-4% target for some time now. In spite of an increase in interest rates, the Korean won lost some ground against the U.S. dollar. At around 6 am GMT, the U.S. dollar rose 0.26% to 1082.90 against the won. The Korean economy is exports-oriented and if interest rates continue to rise, pushing the value of the won higher, the country's exporters will start to lose their competitive edge. This is a scenario the Korean authorities will surely like to avoid. Traders who believe that the Japanese economy will be subdued for some time, which should provide a lot of headwind for the Japanese currency, will be interested in the ProShares UltraShort Yen ETF YCS and the ETFS Short Japanese Yen Long US Dollar ETC (Sterling) ETF (SJPP). Some traders might read a recent string of good economic results as a sign the Japanese economy might be recovering more quickly than analysts had previously predicted. Stronger Japanese recovery should provide additional steam to the yen. As a result, these traders will be interested in the JPY/USD Exchange Rate ETN JYN and ProShares Ultra Yen ETF YCL. Traders who believe the Korean central bank's action is just another sign of how strong the Korean economy is will be interested in the iShares MSCI South Korea Index Fund EWY. Other traders might be worried that the Bank of Korea has kept the interest rates too low for too long, which will create long-term problems in containing inflation. These traders will probably be eager to avoid IQ South Korea Small Cap ETF SKOR.