Tuesday June 21, 2005 - 10:02:45 GMT
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INVESTICA Ltd - www.investica.co.uk
Oil questions for yen
The dollar strengthened to a high of 109.6 against the yen before weakening back to 109.25 in late New York and was little changed in early Europe on Tuesday. The yen recovered from lows beyond 133.0 against the Euro.
The high level of oil prices will continue to leave the yen vulnerable to selling pressure in the short term as it will undermine the Japanese balance of payments position. The high energy costs could, however, erode the threat of further deflation and could accelerate a Bank of Japan tightening if domestic spending strengthens. There is also likely to be greater overall optimism over the Japanese economy.
The short-term yield considerations will remain negative for the Japanese currency, especially with US interest rates set to increase again next week, and this will encourage a flow of funds out of Japan. Great caution is required, however, as any increase in risk aversion would result in substantial flows back to Japan.
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