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Tuesday September 12, 2006 - 21:35:28 GMT
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FOREX-Dollar shrugs off US trade gap, bounces vs yen

FOREX-Dollar shrugs off US trade gap, bounces vs yen
Tue Sep 12, 2006 5:03pm ET169

(Updates prices, refreshes lead, adds Fed's Yellen)

By Amanda Cooper

NEW YORK, Sept 12 (Reuters) - The dollar hit a five-month high against the yen and edged up against the euro on Tuesday, as interest rate differentials continued to favor the dollar, despite a widening in the U.S. trade deficit to a new record in July.

Then yen has fallen in the past few days as the perception has grown that the Bank of Japan will leave interest rates on hold this year and recent weak Japanese economic data has supported that view.

"The BOJ not signaling rates would rise ... the soft (Japanese) machine tool numbers, I think those are kind of in a way excuses for the market to sell the yen," said Meg Browne, senior currency strategist at Brown Brothers Harriman in New York.

The dollar has seen some support in the past week, as investors have scaled back their bets that the Federal Reserve will leave rates unchanged for the rest of the year, meaning interest rate differentials between the U.S. and Europe and Japan will not likely narrow.

San Francisco Federal Reserve President Janet Yellen on Tuesday repeated the need for monetary policy to maintain a bias toward additional rate increases, but given that her remarks were in line with her comments last week, the market did not react.

"The market has got too ahead of itself with respect to declaring the end of Fed tightening on the premise of a hard landing next year," said Michael Woolfolk, senior currency strategist with Bank of New York.

"There is no existing data to support that yet. Not that it won't happen, it's just premature," he said.

The dollar reached a session high of 118.15 yen but ran into options-related buying of yen and selling of dollars and by late afternoon had retreated to 117.95 yen to show a 0.3 percent gain on the day.

The euro meanwhile was under pressure, despite European Central Bank officials signaling their concern about euro zone inflation and the possibility of higher euro interest rates.

The euro was down 0.1 percent at $1.2689 , testing a session low at $1.2672, but was up nearly 0.2 percent against the yen at 149.71 yen.

Price movements were erratic throughout the day, with the euro touching a session peak at $1.2733, according to Reuters data, after the U.S. government said the July trade gap hit a record $68.04 billion, but then the euro slipped back.

For more on the trade data, click on [ID:nN12268675].

Given the widening U.S. trade deficit, investors have been positioned against the dollar for some time, but have not fully reaped the benefits, as both the euro and the yen have yet to post and hold solid gains against the U.S. currency.

Joseph Trevisani, chief market strategist at FX Solutions in Saddle River, New Jersey, added that investors have grown used to negative trade reports and rarely view it as a fundamental reason to sell the dollar.

"In order for a number to supply volatility, it has to surprise the market once in a while, and it's been a long time since this has surprised anyone," he said.

In fact, a break of the euro's six-week low hit last week of $1.2650, would trigger more broad-based dollar buying, traders said.

"If we get through this level, down $1.2660 we could ultimately see ... a re-test of the lows from the summer," said BBH's Browne.

The dollar also hit a session peak against the Swiss franc at 1.2519 Swiss francs after a Swiss central bank official earlier told local media the economy is expected to slow next year. [ID:nZAT005443] (Additional reporting by Kevin Plumberg and Steven C. Johnson)

© Reuters 2006. All Rights Reserved


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