Tuesday July 1, 2008 - 11:18:36 GMT
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Reuters - www.reuters.com
FOREX NEWS-Yen broadly higher, euro shrugs off weak data
* Dollar down 0.7 percent at 105.36 yen
* Euro shows muted reaction to euro zone manufacturing data
* Aussie slips after RBA signals more rate hikes unlikely
(Updates prices, changes byline)
By Ian Chua
LONDON, July 1 (Reuters) - The yen climbed on Tuesday,
benefiting from mounting risk aversion as heightened fears about
further losses in the banking sector prompted investors to dump
riskier assets like stocks.
The euro rose against the dollar, holding near Monday's
three-week peak on expectations the European Central Bank will
carry out its well-telegraphed intention of raising interest
rates by a quarter point to 4.25 percent on Thursday.
Data showing euro zone manufacturing activity contracted for
the first time in three years in June and output prices matched
April's year high failed to draw any major market reaction.
"The market is still focused on yesterday's higher than
expected inflation reading of 4.0 percent. There is nothing
really that has changed or given the market reason to change the
view that come Thursday, the ECB will raise interest rates by a
quarter of a point," said Derek Halpenny, senior currency
strategist at BTM-UFJ in London.
The yen tends to garner supp├┐ort in times of heightened risk
aversion as investors reverse trades financed by borrowing the
Japanese currency at low interest rates.
Halpenny said the yen's strength was also driven by a
narrowing of yield differentials.
Markets have begun to take the view that the Federal Reserve
has little scope to tighten aggressively to fight inflation
given a sharply slowing economy.
"Yen volatility has spiked higher and to us that is the
worst kind of mix for selling the yen, that is higher volatility
and lower yield differentials and as long as that persists ...
we continue to forecast the yen to strengthen to higher levels,"
By 1045 GMT, the dollar had fallen 0.6 percent to 105.40 yen
<JPY=> while the euro slid 0.3 percent to 166.71 yen <EURJPY=R>.
Implied one-month dollar/yen volatility was holding near
one-month highs hit on Monday at 12.30 percent <JPY1MO=>.
The euro rose 0.3 percent versus the dollar to $1.5808
Earlier, the Bank of Japan's closely watched tankan
quarterly survey showed a smaller-than-expected decline in
Japanese business sentiment. Still, confidence among big
manufacturers sank to a five-year low. [ID:nT265283]
Renewed concerns about the health of the U.S. economy are
keeping the dollar under pressure. The greenback was down 0.4
percent against a basket of major currencies at 72.178, starting
the third quarter of 2008 on the back foot.
In the previous quarter, the dollar index .DXY posted its
first gain after six straight quarters of decline.
"A further surge in commodity prices, weak global equities
and the fading impact of dollar-positive Fed comments have left
dollar under renewed pressure," said RBC currency analysts in a
Risk aversion in currency markets was stoked by falling
equities, with MSCI's main world equity index .MIWD00000PUS
falling 0.7 percent. The FTSEurofirst 300 index of top
European shares also shed 2.1 percent.
The market is now bracing for U.S. factory data at 1400 GMT.
Economists polled by Reuters forecast the Institute for Supply
Management's index of manufacturing activity will contract for a
fifth consecutive month in June.
A weak dollar and inflation pressures also helped drive
sterling briefly above the psychological $2 level.
The Australian dollar eased against the dollar after the
central bank kept interest rates unchanged at a 12-year high of
7.25 percent as expected, and signalled more rate hikes were
unlikely in the near term. [ID:nSYD15848]
The Aussie was down 0.2 percent at $0.9563 after earlier
falling as low as $0.9535.
(Editing by Mike Peacock)
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