Wednesday July 12, 2006 - 10:19:11 GMT
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Reuters - www.reuters.com
FOREX-Yen weakens on uncertainty over BOJ rate rises
LONDON, July 12 (Reuters) - The yen fell against the euro and the dollar on Wednesday, weighed down by uncertainty over the size of a widely expected Japanese interest rate hike later this week and the prospects for further moves thereafter.
The dollar ticked up against the euro but stayed within striking distance of one-month lows ahead of data later in the day that could show a widening in the U.S. trade deficit.
Most dealers expect the Bank of Japan's to raise rates for the first time in six years on Friday as the country recovers from a near decade-long bout of deflation.
But some say there is a risk the BOJ could raise the benchmark overnight call rate by less than 25 basis points and the hike in the discount, or Lombard lending rate, could be smaller than the expected 40 basis points.
There is also uncertainty about the speed of any subsequent rate hikes, especially in light of continued pressure from some Japanese government officials against higher rates.
"Some traders are betting that the Bank of Japan won't raise rates more than once this year, and that's leading to a softer yen and a stronger U.S. dollar. That stronger U.S. dollar is then translated across to the euro and sterling," said Kris Bernie markets economist at National Australia Bank.
By 0949 GMT, the dollar was up 0.4 percent at 114.70 yen , more than one yen above a one-month low hit on Monday.
The euro was at 146.20 yen , down around 0.1 percent on the day.
Against the dollar, the single European currency was about a quarter of a percent weaker, at $1.2745 , a cent away from a one-month high of above $1.2860 touched last week.
TRADE DATA A HURDLE FOR DOLLAR
Analysts said the dollar could come under selling pressure after the release of U.S. trade data at 1230 GMT.
A Reuters poll showed the trade deficit probably swelled to $64.9 billion in May from $63.4 billion in April.
"The trade figures should provide some excitement after a few dull sessions," said Niels Christensen, senior currency strategist at Societe Generale in Paris.
"The outlook for the Federal Reserve is still the most important factor but a wider deficit could help euro/dollar."
Although the dollar's interest rate advantage has helped to support the currency since the end of 2004, an expanding deficit could draw attention back to the huge U.S. trade shortfall.
Washington is widely seen favouring a weaker currency to help curb the deficit by making U.S. exports more competitive.
Weaker-than-expected jobs data last week have lowered expectations of an August rate hike from the Fed, which has raised its key overnight rate 17 times since June 2004.
But the BOJ policy meeting looms large.
Japanese Finance Minister Sadakazu Tanigaki said on Wednesday there was no need for the BOJ to rush into ending zero rates but added that it was not good for the government to frequently ask the BOJ to delay policy decisions.
"When you see these comments from the government, effectively signalling to the Bank of Japan (that they should move) less rather than more, I think that the market tends to reassess its expectations of tightening in Japan," said Steven Saywell, currency strategist at Citigroup.
Even if the BOJ hikes rates by as much as expected, it would do little to cut the rate advantage held by the yen's major rivals.
At 5.25 percent, the U.S. rate would continue to dwarf Japanese rates for a while, while the European Central Bank is widely expected to boost its key rate to 3 percent next month.
Â© Reuters 2006. All Rights Reserved.
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