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Friday August 18, 2006 - 10:25:49 GMT
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FOREX-Yen rallies from record low vs euro on China rate hike

FOREX-Yen rallies from record low vs euro on China rate hike
Fri Aug 18, 2006 6:16am ET139

(Changes byline, adds fresh quotes, update prices)

By Carolyn Cohn

LONDON, Aug 18 (Reuters) - The yen rallied from record lows against the euro on Friday after China unexpectedly raised interest rates.

The Japanese currency, often traded as a proxy for the yuan, rose a third of a percent to the day's highs against the euro and dollar in European trade after China raised interest rates by 27 basis points.

"The impact on the yen should not be very big, but it will put a bit more upward pressure on the remnimbi (yuan)," said Thomas Harr, senior analyst at Danske Bank in Copenhagen.

The euro earlier hit a record high near 149 yen on electronic trading platform EBS, lifted by a stronger interest rate outlook for the euro zone than Japan.

The yen has been under pressure due to a view the European Central Bank will keep tightening policy after raising interest rates to 3 percent this month, while Japanese borrowing costs are seen staying at 0.25 percent for now.

"The BOJ seems to have become a bit more cautious in their rhetoric over the last couple of weeks," said Derek Halpenny, currency economist at BTM-UFJ.

BOJ Governor Toshihiko Fukui reiterated on Friday that the central bank would adjust rates only gradually, Kyodo news service reported.

The euro was trading at the day's low of 148.21 yen by 1000 GMT , down 0.37 percent from the U.S. close.

The dollar was at the day's lows of 115.56 yen , also down more than a third of a percent from the U.S. close.

The euro was flat at $1.2825 .


Investors were not anticipating a Chinese rate rise on Friday, but there has been speculation this week about a widening in the yuan trading band, following a 2.1 percent revaluation in July 2005.

The official China Securities Journal said on Friday that China should widen the yuan's trading band versus the dollar because greater currency flexibility will help reduce the country's trade surpluses.

"It's difficult to say if the rate rise is more or less likely to lead to a widening of the band," said Danske Bank's Harr.

"We should see these issues as separate -- the interest rate rise is to slow the economy, the currency band widening is to slow down capital inflows."


On a thin day for economic data, players will scrutinise the University of Michigan's preliminary reading of consumer confidence for August due at 1345 GMT.

Economists in a Reuters poll say the sentiment index likely fell to 83.6 from the final reading of 84.7 in July.

Although the data is unlikely to alter rate expectations greatly, analysts say investors are eager for any clues about the future path of U.S. monetary policy.

The Fed kept its funds rate at 5.25 percent last week after boosting it at 17 straight meetings over the past two years, though it left the door open for more tightening if price pressures persist.

The dollar rose on Thursday after the Philadelphia Federal Reserve's index of business conditions climbed in August to the highest level since April 2005.

The data helped the dollar recoup some losses made this week after reports on producer and consumer prices and housing came in weaker than forecast, reinforcing expectations the Federal Reserve could keep interest rates on hold next month.

© Reuters 2006. All Rights Reserved.


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