Wednesday July 5, 2006 - 09:44:55 GMT
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Reuters - www.reuters.com
FOREX - Yen hits record low vs euro after N.Korea missiles
LONDON, July 5 (Reuters) - The yen hit an all-time low against the euro on Wednesday as news North Korea test-fired at least six missiles deepened losses stemming from expectations Japanese interest rates would only rise gradually.
The euro climbed to a one-month high against the U.S. currency, boosted by speculation that the European Central Bank could signal a quickening in the pace of monetary tightening when it meets on Thursday.
The yen has been under pressure this week as investors expect the Bank of Japan to take its time raising interest rates, currently at zero. Japan is expected to increase rates next week but that will still leave it far behind the ECB which looks set to tighten further from the current 2.75 percent.
"Euro/yen has been trending upwards for a while and the test caused a few jitters. But it has already retraced as there is a reluctance to push it higher ahead of the ECB and (U.S. June) payrolls," said Daragh Maher, currency strategist at Calyon.
"There is a greater chance of the ECB being more hawkish. A hike of some magnitude is priced in Japan but a 25 basis point hike is not fully priced in. So there is greater uncertainty surrounding the interest rate dynamics in Japan."
The yen had fallen to a low of 147.31 per euro , its lowest since the single currency was launched in 1999, before trimming losses to 146.80 by 0810 GMT. Against the dollar it was down a quarter percent at 115.06 yen .
The euro was down 0.3 percent on the day at $1.2784 .
A wave of safe-haven buying after the North Korean missile launches pushed the Swiss franc to a fresh eight-year high against the yen , while gold rose by more than 1 percent to a one-month high.
The ECB is seen leaving rates on hold at a policy meeting on Thursday after it hiked rates by 25 basis points last month, but a recent run of strong data increased expectations for a rise in August.
A survey showed growth in the euro zone services economy hit a six-year high in June and was perhaps nearing a peak, but strong inflation pressures also underlined the risk of faster interest rate increases.
In contrast, the Federal Reserve signalled it may pause its two-year tightening campaign after delivering a 17th straight rate increase last week.
Investors are focused on the June payrolls report due on Friday but will look at figures for factory orders in May due at 1400 GMT.
"The Fed made clear it expected a moderation in growth and payrolls are a key activity parameter. Soft employment growth would not put upward pressure on wages," Maher said.
In Japan, a possible BOJ rate hike at its July 13-14 Policy Board meeting would be its first tightening in six years.
"The market has not yet fully priced in a 25-basis-point rate increase by the BOJ," said Masafumi Yamamoto, currency strategist at Nikko Citigroup.
"If the central bank really raises the overnight rate by that much, it should prompt some yen buying."
Â© Reuters 2006. All Rights Reserved
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