Monday February 19, 2007 - 11:59:37 GMT
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Reuters - www.reuters.com
FOREX-Low-yielding yen falls broadly as BOJ looms
LONDON, Feb 19 (Reuters) - The yen fell against the euro and dollar on Monday, eroding last week's gains, as expectations grew that a possible Bank of Japan interest rate hike this week was unlikely to change the yen's appeal as a funding currency.
With much of Asia shut for Chinese New Year celebrations, and the United States marking Presidents' Day holiday, currencies were likely to remain in tight ranges ahead of the BOJ decision and U.S. inflation data on Wednesday.
Investors are pricing in an around 60 percent chance of the BOJ rate hike to 0.5 percent after last week's strong domestic growth data which also triggered broad-based yen buying.
But speculation lingers that the BOJ could come under political pressure not to raise rates.
"The market is not convinced about any policy change. It's 50-50 split whether BOJ will tighten rates. It's ebbing and flowing. Without (rate) futures selling off further in the next 24 to 48 hours, we find it difficult for the yen to rally from here," said Adam Myers, currency strategist at UBS.
"Investors will continue to fund out of the Japanese currency and that will remain in place until we see more concerted rhetoric which suggest (yen buying) intervention is on the way."
By 1055 GMT the dollar had risen to 119.73 , off Friday's six-week low of 118.96.
The euro was up 0.15 percent at 157.00 yen while against the dollar it was down slightly at $1.3120 .
The dollar hit a six-week low at 1.2347 Swiss francs .
Sterling fell nearly a full U.S. cent and hit a six-week low versus the euro after the Bank of England said some depreciation of the real effective exchange rate will probably be necessary.
YEN AND POLITICS
The yen Overnight Index Swap showed a roughly 60 percent chance of a Japanese rate hike this week, up from a low of 30-35 percent last week.
Japanese politicians have said it is up to the BOJ to decide on policy, but vice finance minister Hideto Fujii declined to comment on Monday on what the government would do if the BOJ proposed a rate hike on Wednesday.
The government can put in a request to delay a policy decision until the next meeting, although the BOJ can disregard such a request.
The dollar fell 2 percent against the yen last week, its worst weekly slide in nine months on an array of weak data and comments from Federal Reserve Chairman Ben Bernanke that inflation was starting to cool.
Weaker-than-expected U.S. data -- including figures on the housing market, capital flows and industrial production -- has reignited talk of a possible interest rate cut in coming months.
Investors are expecting the Fed to keep rates steady at its March meeting at 5.25 percent, and have boosted chances of a June rate cut to 24 percent.
"It is obvious the dollar sentiment is shaky, as recent data have shown some doubts about the U.S. economic recovery ... It means that a rate cut later this year could become the favourite scenario and this is of course a dollar negative development," KBC said in a research note.
Â© Reuters 2007. All rights reserved.
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