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Monday September 4, 2006 - 22:48:05 GMT
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FOREX-Yen jumps vs euro, dollar on solid capex data

FOREX-Yen jumps vs euro, dollar on solid capex data
Mon Sep 4, 2006 10:11am ET146

(updates prices, adds quotes)

By Veronica Brown

LONDON, Sept 4 (Reuters) - The yen rose sharply on Monday after firm capital spending data raised speculation that the Bank of Japan may adopt a slightly more hawkish tone, prompting investors to unwind short positions.

The upbeat Japanese data came after a run of disappointing news on inflation and industrial production, which had dampened expectations for the Bank of Japan to raise rates from the current 0.25 percent this year and sent the yen to record troughs versus the euro.

Net yen short positions jumped to record highs in the week to Aug. 29, according to data from the Commodity Trading Commission.

Investors readjusted their holdings on Monday after data showed Japanese firms increased capital spending (capex) by 16.6 percent in the April-June quarter compared with a year earlier.

"The yen has probably been the star performer today among the majors. We've broken through some very key technical levels at 116 yen, which suggests that we have the top in place for dollar/yen and also in euro/yen," BNP Paribas senior foreign exchange strategist Ian Stannard said.

"Unwinding of positions is going to be the driving force behind this move in the yen."

Some investors also said the data increased the chances that the Bank of Japan could follow up July's rate hike -- the first in six years -- with another such move before long.

By 1354 GMT, the yen was up around one percent on the day against the dollar at 115.93 yen, its strongest level since Aug. 22 .

The yen climbed 0.7 percent against the euro to 149.12 yen , recovering from last week's record lows of 150.78 yen, according to Reuters data.

The Japanese currency rose 1.3 percent against the New Zealand dollar , which dropped more than one percent at one point against the U.S. dollar .

Market volatility was sharpened by the absence of U.S. participants due to the Labor Day public holiday.

Also on Monday, China's Vice President said in a ruling Communist Party newspaper that Beijing would act to slow the growth of its foreign exchange reserves and spend more on imports of strategically important resources and high-tech goods.


The euro was 0.2 percent up against the dollar at $1.2866 . The greenback briefly spiked higher on Friday after a keenly-watched U.S. jobs report came in a bit better than expected.

The U.S. economy generated 128,000 non-farm jobs in August, just above median expectations of 120,000.

But the dollar's strength proved short-lived as investors concluded that the jobs report did little to change the outlook for U.S. interest rates.

The Federal Reserve paused in its two-year-old tightening cycle last month and most now expect rates to be stuck at 5.25 percent for a while.

Danske Bank said in a research note that Friday's data suggested U.S. growth would remain close to trend in the second half of this year as underlying demand was still solid.

"Robust demand and rising core inflation will keep the Fed under pressure, and we expect the tightening cycle to be resumed around New Year," Danske's research note said.

A Reuters poll taken after the release of the jobs data showed that just one out of 21 U.S. primary dealers expects the Federal Reserve to raise interest rates at its Sept. 20 meeting, after the central bank held rates steady in August, breaking a string of 17 consecutive rate increases.

By comparison, many market players expect the European Central Bank to raise interest rates two more times by the end of the year, to 3.5 percent, from 3.0 percent now.

The euro was little changed by data showing industrial prices in the euro zone hit a 10-year high.

Producer price inflation excluding energy accelerated to 3.4 percent in July from 3.0 percent in June, marking its fastest annual increase since November 1995.

ECB Governing Council member Erkki Liikanen is due to speak later in the day.

© Reuters 2006. All Rights Reserved.


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