Monday July 10, 2006 - 10:19:20 GMT
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Reuters - www.reuters.com
FOREX-Yen hits 1-month high vs dlr as BOJ tightening looms
LONDON, July 10 (Reuters) - The yen hit a one-month peak against the dollar and a two-week high versus the euro on Monday as markets braced for the first Bank of Japan interest rate hike in nearly six years, which is expected later this week.
The dollar held near Friday's one-month low versus the euro, struck after a weaker than expected U.S. jobs report tempered expectations for the Federal Reserve to raise interest rates again in August.
The BOJ is expected to raise interest rates by 25 basis points from current levels around zero on Friday.
There has been some opposition from government officials who called on the central bank to act cautiously but Economics Minister Kaoru Yosano told Reuters on Monday the time was ripe to discuss ending the BOJ's zero interest rate policy.
"Speculation ahead of the BOJ meeting is really supporting the yen and that's why we are seeing it performing so well," said Niels From, currency strategist at Dresdner Kleinwort.
"Given the disappointing labour market report we had out of the U.S. on Friday, and with those numbers supporting the view that the Fed might be on hold now ... it's very much a story about relative monetary policy."
By 0930 GMT, the dollar had fallen to a one-month low of 113.36 yen , down 0.5 percent on the day.
The euro was also down 0.5 percent at 145.40 yen , around levels last seen in late June and off the record highs around 147.40 yen hit last week.
The euro was down 0.2 percent at $1.2779 , off a one-month peak of above $1.2860 marked on Friday.
Yosano said ending the zero rate policy would remove an uncertain factor from the market. A senior official of Japan's ruling Liberal Democratic Party was quoted as saying it was up to the BOJ whether to raise interest rates from zero.
But government spokesman Shinzo Abe said the bank should continue to leave rates at zero to support the economy.
"With the Japanese government clearly opposed to a rate increase and the GDP deflator still negative (i.e. real GDP growing faster than nominal GDP) we suspect the BOJ will opt for a smaller than expected calibre of rate hike, 10-15 basis points as opposed to the widely expected 25 basis points move," HBOS Treasury Services said in a note to clients.
Some analysts said the yen, which is often traded as a proxy for the yuan, was likely to be firm in the lead up to the one year anniversary of China's July 21 currency revaluation.
In the euro zone, investors are focused on the Eurogroup of euro zone finance ministers and European Central Bank officials which meets at 1700 GMT in Frankfurt.
The ECB last week held rates at 2.75 percent, as expected, but President Jean-Claude Trichet said the bank would "exercise strong vigilance" -- phrasing which was interpreted as signalling a rate hike on Aug. 3.
FED OUTLOOK UNCLEAR
On Friday, the U.S. employment report showed employers added a weaker-than-expected 121,000 jobs in June.
Interest rate futures markets showed investors' expectations the Fed will raise rates in August dropped to a 62 percent chance after the data was released, from 70 percent beforehand.
The figures highlighted concerns about a slowdown in the U.S. economy, though dealers said a big gain in wages left inflation concerns intact.
Henry Paulson will be sworn in as U.S. Treasury Secretary at 1500 GMT, replacing John Snow. Investors will be looking for more clues on his stance on the dollar.
Â© Reuters 2006. All Rights Reserved.
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