Tuesday June 20, 2006 - 10:44:54 GMT
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INVESTICA Ltd - www.investica.co.uk
BOJ signals rate increase
The yen found some support weaker than 115.50 against the dollar and secured a recovery in Asian trading on Tuesday with no further developments over the North Korean missile tests. The yen strengthened to 114.70 in early Europe before settling close to 115.00.
Bank of Japan governor Fukui stated that the central bank would take a pro-active stance on monetary policy to keep inflation under control. He also stated that the bank should act early, but tighten policy in gradual steps. These remarks suggest that the central bank will look to increase interest rates slightly in July which will offer some near-term yen support, especially as markets had moved to price out a July increase. The bank will still only sanction only a very small near-term rate increase from zero.
The impact will therefore be measured unless there is evidence of US economic deterioration and a reversal in US interest rate expectations, but it is the case that any downward shift in US expectations could trigger sharp yen gains. In this context, the US housing data will be watched closely on Tuesday.
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