Tuesday January 25, 2005 - 11:08:51 GMT
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INVESTICA Ltd - www.investica.co.uk
Asian resistance supports dollar
The yen hovered close to 102.7 against the dollar in subdued trading on Monday before rallying slightly to 103.1 in early Europe on Tuesday. Euro/yen moves have tended to dominate with a move down to 133.7 on Monday reversed on Tuesday with a move back to 134.8.
Official exchange rate policies will tend to dominate in the short term. There was a limited market reaction to European calls for Asian currency gains as the impact has lessened over the past few days due to reduced speculation that Japan or China will take action after the G7 meetings. This shift has been fuelled by Chinese comments suggesting that revaluation is unlikely in the short term and will lessen the potential for near-term yen gains. There is, however, a small risk that the underlying political tensions will spill out and cause wider dollar selling pressure.
There will certainly still be behind the scenes pressure on Asian authorities to let currencies appreciate and there is a risk that this will spill over into wider selling pressure on the dollar, especially if there is a public row. Japanese authorities are likely to focus on preventing excess volatility which will deter dollar selling below 102.0.
The Nikkei index will need to be watched in the short term as a decline in the technology sector would tend to undermine the yen. The longer-term flows are still liable to put upward pressure on the yen unless there is a major downturn in the technology sector.
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