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Monday September 11, 2006 - 20:38:51 GMT
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FOREX-Yen slides as rate outlook worsens, euro up

FOREX-Yen slides as rate outlook worsens, euro up
Mon Sep 11, 2006 3:48pm ET184
(Updates with analyst comments, refreshes prices, changes byline)

By Amanda Cooper

NEW YORK, Sept 11 (Reuters) - The yen fell to two-month lows against the dollar on Monday and declined sharply versus the euro as a perception that Japanese interest rates are unlikely to rise this year soured investor sentiment toward the currency.

A steep decline in Japanese factory orders hit the yen overnight. Traders said selling picked up after European Central Bank board member Juergen Stark hinted at an October interest rate hike in interviews with French and German media.

Stark's comments also pushed the dollar lower against the euro, while a slide in commodities weighed on currencies that typically track resource prices, including the Canadian and Australian dollars and the Mexican peso.

But by afternoon in New York, much of this action had played out, leaving the euro up 0.7 percent at 149.27 yen . The dollar was up 0.5 percent at 117.53 yen , near the 117.88 hit on July 19.

"The market is not giving Japanese data -- or rhetoric -- the benefit of the doubt. If it's anything shabby, they really sort of crucified the yen on the back of it," said David Mozina, head of New York foreign exchange strategy at Lehman Brothers.

Traders said the bets are leaning heavily against the yen, largely because the market expects the Bank of Japan to keep interest rates steady at 0.25 percent for the rest of the year, having pretty much dashed expectations for another quarter-point rise.

Yen weakness may be short-lived, though, said Tim O'Sullivan, chief trader at in Bedminster NJ.

With Group of Seven finance ministers expected to discuss exchange rate flexibility when they meet in Singapore later this week, "the dollar should eventually head south against the yen," O'Sullivan said.

In April, G7 leaders urged countries with large surpluses to embrace more flexible exchange rates, and in the following weeks, the dollar tumbled to around 109 yen, from 116.50 yen.

On Monday, the IMF reiterated the need for China to move to a more flexible exchange rate. But this had little impact on the yen, which often trades as a proxy for the tightly controlled Chinese currency.

The ECB meanwhile is widely expected to raise rates in October and Stark reinforced this view when he told Germany's Handelsblatt newspaper that he expects euro-zone inflation to remain above the bank's target this year and next and that he does not view higher rates as a risk to the economy.

The euro was up 0.2 percent at $1.2701 , off its session peak of $1.2741 but above Friday's six-week trough of $1.2651.

Traders said the dollar also faces a dwindling interest rate advantage vis-a-vis the euro that should weigh on it in the sessions ahead.

Earlier on Monday, St. Louis Federal Reserve President William Poole said strong business investment suggested the U.S. economy is far from weak, despite a slowing housing sector.

He also cautioned that inflation was running above his comfort-zone and said that if it did not ease over the medium term he would rather "act earlier rather than later."

Poole's remarks caused little reaction in the currency markets as Poole has maintained a much more openly hawkish view on Fed policy than some of his colleagues.

The recent slide in commodity prices has also alleviated some concerns about inflation and reinforced a view that the Fed will be able to leave rates unchanged this year, having paused last month following two years of credit tightening.

Spot gold tumbled below $600 an ounce on Monday while oil was down for a sixth straight session, the longest losing streak for crude in nearly three years.

"A lot of the concern was (previously) about inflation emanating from commodity price rallies, and the retracement is making people more comfortable," said George Davis, senior currency strategist at RBC Capital Markets in Toronto.

All this weighed heavily on the commodities currencies, leaving the Australian dollar down nearly 0.4 percent at $0.7509, the U.S. dollar up about 0.1 percent against the Canadian dollar at C$1.1214.

(Additional reporting by Steven C. Johnson)

© Reuters 2006. All Rights Reserved


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