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Monday December 22, 2008 - 21:15:19 GMT
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FOREX NEWS-Dollar firms vs yen, buoyed by Japan data, BoJ caution

Mon Dec 22, 2008 4:07pm EST

* Dollar up vs yen as BoJ warns of further export woes

* Euro gains; doubts about U.S. auto bailout loom

* Market expects ECB rate cut; policy-makers seem divided (Updates prices, adds comment, changes byline)

By Gertrude Chavez-Dreyfuss

NEW YORK, Dec 22 (Reuters) - The U.S. dollar recovered some ground against the yen on Monday after sharp losses last week, boosted by data showing Japanese exports slumping and by a warning from the Bank of Japan that its economy has deteriorated and is likely to get worse.

The dollar slipped against the euro in holiday-thinned trading as demand for the U.S. currency slowed, with credit conditions easing further. Improved market liquidity came as a result of the Federal Reserve's aggressive interest rate cut last week including a slew of measures undertaken by central banks to ease the global credit crunch.

"The dollar's gains against the yen were the residual effects of the Bank of Japan's rate cut last week, its warnings about excessive yen strength, and today's bad economic data in Japan," said Omer Esiner, a senior market analyst at Ruesch International in Washington.

"But overall we are just seeing a slowing in the dollar's decline against the yen and not a reversal of the yen's strength. Today's price action reflects market consolidation, more than anything else after a volatile week."

The dollar rose above 90 yen <JPY=> for the first time in nearly a week after BoJ Governor Masaaki Shirakawa said yen strength and a global slowdown may reduce Japanese exports further even after a record plunge in November. He added that Japan's economic conditions are likley to become more severe. For details, see [ID:nT298327].

By late trading, the dollar rose 0.9 percent to 89.94 yen, while the euro gained 1.1 percent to 125.49 yen <EURJPY=>.

"All Asian exporters are at risk in this global economic slowdown, but Japan is at the top of the list," said Dustin Reid, senior currency strategist at RBS Global Global Banking & Markets in Chicago. "The stronger yen has been playing havoc for Japanese exporters, and the auto companies in particular are likely to be significantly affected."


So far this year, Japan's currency was up 19 percent against the dollar and nearly 23 percent versus the euro. Last week, the Bank of Japan cut interest rates to near zero, which helped slow the yen's rally.

In China, its move to cut lending and deposit rates by 27 basis points -- its fifth cut since September -- shed more light on the severity of the global slump. [ID:nPEK256295].

The euro rose 0.3 percent to $1.3953 <EUR=> but was well off its session peak of $1.4123. Sterling fell 0.5 percent to $1.4842 <GBP=>, while the euro rose 0.8 percent to 94.00 pence <EURGBP=>, near a record high of 95.56 pence touched last week. [ID:nLM705658].

Warnings from Bank of England policy-makers that interest rate policy may not be enough to boost the economy renewed pressure on the pound, which has shed more than 25 percent against the euro and dollar this year. [ID:nLM559877].

But that run lower may run out of steam, according to strategists at Bank of America who recommend buying sterling against the dollar at $1.4750 ahead of an expected rise to $1.60.

In the United States, doubts about whether a bailout of U.S. automakers would lift the economy out of recession has limited the dollar's gains. On Friday, the government announced emergency loans for General Motors (GM.N: Quote, Profile, Research, Stock Buzz) and Chrysler.

While the U.S. move averted a crisis for now, traders said uncertainty over the auto companies' restructuring plans has raised worries about the long-term economic impact.

Last week, the Fed cut benchmark interest rates to near zero, underscoring the depth of the economic crisis and undermining support for the dollar.

Investors are also looking for the European Central Bank to cut interest rates, currently at 2.5 percent, in January, though ECB executive board member Lorenzo Bini Smaghi warned about the risks of monetary policy being too lax, according to the Rome newspaper Il Messaggero [ID:nLL383892]. (Additional reporting by Steven C. Johnson)

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