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Wednesday September 13, 2006 - 20:28:52 GMT
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FOREX-Yen stages technical bounce, dollar pares some losses

FOREX-Yen stages technical bounce, dollar pares some losses
Wed Sep 13, 2006 3:52pm ET

By Amanda Cooper

NEW YORK, Sept 13 (Reuters) - The yen broke a three-day losing streak against the dollar on Wednesday largely on technical positioning, but some dealers saw a risk of renewed weakness for the Japanese currency.

Traders attributed the rebound from this week's five-month lows largely to protective measures ahead of a weekend Group of Seven industrialized nations meeting and risks that European leaders may make fresh calls for further yen strength.

By afternoon trade in New York, the dollar had pared some of the day's losses but was still down across the board, even though it sat within a whisker of two-month highs against a basket of major currencies <.DXY> seen on Monday.

Traders were left to focus on Thursday's retail sales data for July, which could provide evidence not just of how active consumers have been over the summer, but also clues of much they are likely to spend during the key holiday season at the year-end.

Wall Street often looks at late summer back-to-school sales as an indication of what December sales will look like.

But the focus remained on the yen's recovery despite a backdrop of waning expectations for further Japanese rate rises and short-term bullishness toward the dollar.

"The yen's performance is surprising given that, first of all, higher yielders are generally doing better -- and that should be bad for the yen," said Daniel Katzive, foreign exchange strategist with UBS Securities in Greenwich, CT.

In addition, he said, "the perception in the market was that Treasury was perhaps taking a longer-term view on the dollar/China exchange rate, and that should also be negative for the yen."

The market may be concluding that a softer approach will be more effective in persuading China to loosen its grip on the tightly-controlled yuan and allow its currency to appreciate further, he said.

The yen is often traded as a proxy for the Chinese yuan. U.S. Treasury Secretary Henry Paulson on Wednesday urged China to continue moving toward a more flexible, market-driven exchange rate, although media reports have suggested Paulson will take a soft approach when he visits China next week.

The dollar pared some of its losses against the yen and was last down 0.2 percent at 117.58 yen , above the session low of 117.35 but off a five-month high of 118.15 yen a day ago. The euro was down 0.2 percent at 149.24 yen .

Against the dollar, the euro surrendered some of its gains, to last hold around $1.2692 , barely changed on the day, having hit an intra-day high of $1.2717.

Still, market participants warned the yen in particular remains vulnerable to a near-term decline, as lower Japanese rates mean investors can borrow it cheaply, then sell it to buy higher-yielding currencies in so-called "carry trades."

Similar strategies have weighed recently on the low-yielding Swiss franc before it rebounded on Wednesday .

"The market still wants to sell low-yielders and buy high-yielders, and the yen and Swissie remain relatively weak," said John McCarthy, vice president of foreign exchange at ING Capital Markets in New York.

Traders have punished the yen lately after some weak Japanese economic data bolstered the view that the Bank of Japan will leave interest rates on hold this year

With Japan's interest rates at just 0.25 percent, it will be some time before the yen can narrow significantly its yield gap with most other major currencies.

That leaves it exposed to carry trades, which until now have tended to benefit the high-yielding Australian and New Zealand dollars.

"We're quite bullish on the dollar, as the uninspiring commodity outlook means Aussie and kiwi are not the best places to be," said Divyang Shah, global strategist at IDEAGlobal in London. (Additional reporting by Steven C. Johnson, Kevin Plumberg and Nick Olivari)

© Reuters 2006. All Rights Reserved.


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