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Thursday January 18, 2007 - 11:31:55 GMT
Reuters - www.reuters.com

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FOREX-Yen drops broadly after BOJ keeps rates on hold

FOREX-Yen drops broadly after BOJ keeps rates on hold
Thu Jan 18, 2007 5:11am ET24

By Simon Falush

LONDON, Jan 18 (Reuters) - The yen fell to its lowest in almost 4 years against the dollar and neared record lows versus the euro on Thursday after the Bank of Japan kept interest rates on hold at the lowest level in the industrialised world.

The BOJ's decision to hold rates at 0.25 percent in a 6-3 vote confirmed a big shift in expectations in the past two days after a flurry of reports doused widespread views that a rate rise to a decade-high of 0.5 percent was coming this week.

Even if the BOJ had lifted rates, many analysts believed a move would provide little relief to the yen because short-term Japanese interest rates remain so much lower than those of other currencies and the BOJ has pledged to lift rates only gradually.

Analysts said the decision added further gusto to investors' current preference; using the yen as a funding currency to purchase units with a higher return.

"Japanese retail investors are looking offshore for returns and overseas investors are using the currency for carry trades. We are revising our forecasts and see yen hitting the mid 120s against the dollar," RBC Capital Markets senior currency strategist Adam Cole said.

The decision also raised questions about whether the BOJ had bowed to government pressure against a shift. Japan's economics minister Hiroko Ota said the BOJ and government both held the view that prices and consumption were somewhat weak.

Finance minister Koji Omi said the rate decision was fine and denied the government or politicians put pressure on the BOJ.

By 0930 GMT, the dollar was up 0.6 percent at 121.35, having hit a near 4 year high of 121.45 earlier. The euro gained 0.7 percent to 157.12 yen , pushing closer to an all-time high above 158 hit earlier in the month.

Sterling jumped to 239.80 yen -- its highest since August 1998. The euro was up 0.1 percent on the day against the dollar to $1.2950

US INFLATION WATCH

Beyond the outlook for Japanese rates, investors were looking ahead to a slew of U.S. economic data on consumer prices, housing and regional manufacturing that may show more signs of growth holding up.

Federal Reserve Chairman Ben Bernanke will also testify before Congress on the budget outlook at 1500 GMT and may touch on the economy in answering questions from lawmakers.

Upbeat U.S. data and comments from Fed officials have prompted investors to scale back expectations for rate cuts this year. St. Louis Fed President William Poole said late on Wednesday that current monetary policy was "well positioned".

Economists in a Reuters survey on the December consumer price index expect a median 0.4 percent rise on the month compared with a 0.0 percent reading in November.

"A repeat of the zero reading of last month could prompt speculation about a slight softening in the language on inflation risk, although the Fed will probably want to see several months of evidence before declaring an absolute all-clear," Mellon Bank head of currency research Ian Gunner said in a note to clients.

BOJ TURNABOUT

Japanese media reports this week caught off guard investors who had thought a BOJ rate rise to a decade high 0.5 percent was a done deal despite the political pressure.

After the meeting, BOJ Governor Toshihiko Fukui said those board members opposing the decision wanted a rate increase. Fukui also said the BOJ would continue to adjust rates gradually but that it was appropriate to watch more data given mixed indicators.

The split in the vote on whether to raise rates -- there was a 6-3 vote in favour of keeping them on hold -- indicated that rates may rise in February, driving Japanese government bonds lower. In December, a vote to stand pat was unanimous.

© Reuters 2007. All Rights Reserved.

 

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