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Wednesday January 17, 2007 - 12:08:25 GMT
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FOREX-Yen dips to 13-mth low as rate hike chances fade

FOREX-Yen dips to 13-mth low as rate hike chances fade
Wed Jan 17, 2007 6:41am ET28

(Changes byline, updates prices, adds quotes)

By Simon Falush

LONDON, Jan 17 (Reuters) - The yen dipped to a 13-month low against the dollar on Wednesday as expectations for a rise in interest rates from the Bank of Japan faded following media reports it was unlikely to move this week.

The euro held steady against the dollar, with investors awaiting U.S. inflation data for confirmation prices are high enough and the economy strong enough to stave off any rate cuts in the near future.

Investors had been braced for a BOJ rate rise to 0.5 percent on Thursday, despite some signs of political pressure on the bank to leave rates unchanged.

But these expectations quickly faded after Kyodo news agency, the Nikkei business daily and others reported that the BOJ was likely to keep rates on hold this week.

This further undermined the yen, which has already suffered from investors' recognition that one rate hike from the BOJ would do little to change the currency's low-yielding status.

"Inflation is still very low and consumer spending is not robust. There would only be short-term yen strength (if rates were raised) as the BoJ would give a message to the market that the next rise in interest rates would not be for six to nine months," said Marcus Hettinger, currency strategist at Credit Suisse in Zurich. Continued...

The chance of a BOJ move this week was slashed to about 30 percent from 80 percent a day earlier, according to overnight index swaps, which are contracts based on the outlook for short-term rates.

The dollar climbed as high as 120.87 yen, according to Reuters data, its strongest since December 2005, before reversing gains to trade at 120.43 by 1124 GMT .

The euro was buying 155.60 yen, about two yen above one-month lows hit last week when BOJ rate hike expectations were on the rise, but still some way off record peaks above 158 yen struck at the beginning of the year.

Michael Klawitter, currency strategist at Dresdner Kleinwort said any further yen losses could be capped ahead of a Group of Seven meeting next month, where Japan could come under political pressure over the weakness of its currency.

"(BOJ) might intervene, that is the concern in the market. They would start with verbal intervention," he said.


The euro was little changed from the New York close at $1.2918 . It hit a fresh 2-1/2 year low against sterling, at 65.68 pence , on expectations last week's surprise UK rate hike could be followed by another move soon.

Euro zone data released on Thursday confirmed euro zone consumer prices rose at annual 1.9 percent in December.

The biggest mover among the majors though was the New Zealand dollar, which gapped lower against the U.S. currency and lost around 0.6 percent on the day after news consumer prices fell more than expected in the fourth quarter.

"The lower-than-expected CPI brought the NZD lower ... on the back of fading expectations of a Reserve Bank of New Zealand rate hike in January. However, the largest drag came from the petrol prices-related component," Citigroup said in a note.

"Thus our New Zealand economics team keeps their view that the RBNZ will hike 25 basis points ... We believe that knee-jerk NZD selling upon the CPI release provides an opportunity to add to the NZD longs."

Price data is also due from the United States. U.S. core producer prices, at 1330 GMT, are forecast to have risen 0.1 percent on the month in December after a 1.3 percent increase in November. Consumer price data follows on Thursday.

U.S. capital flows numbers for November are due at 1400 GMT -- expected to show inflows of $77.5 billion -- followed by December industrial output figures at 1415 GMT.

"There is potential for disappointment (on the flows data) ... We think it is likely to come in at $60 billion," said Hettinger at Credit Suisse.

Expectations for near-term U.S. interest rate cuts from 5.25 percent have been scaled back sharply in the past couple of weeks in the wake of stronger than expected economic data.

© Reuters 2007. All Rights Reserved.


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