Tuesday February 20, 2007 - 12:17:26 GMT
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Reuters - www.reuters.com
FOREX-Yen slides, investors see through potential BOJ move
LONDON, Feb 20 (Reuters) - The yen extended losses against the dollar and euro on Tuesday, pressured by a growing view that a potential Bank of Japan interest rate rise was unlikely to curb the yen's appeal as a funding currency.
The dollar meanwhile hit a six-week low against the euro ahead of this week's key U.S. inflation figures. Investors are divided on whether the BOJ will lift borrowing costs to a decade-high of 0.5 percent on Wednesday. But even with a rate hike, the offered yield would still be the lowest in industrialised countries.
"It looks like the BOJ will raise rates tomorrow, but that is very finely balanced. We think the yen is going to weaken in coming months...whatever happens tomorrow if they raise rates by 25 basis points, it's not going to affect the relative attractiveness of foreign assets (for Japanese investors)," Barcalys Capital currency strategist Adarsh Sinha said.
By 1105 GMT, the dollar had risen to 120.22 yen , moving further away from a six-week low of 118.96 set last week.
The euro was up 0.4 percent at 157.96 yen , approaching its record high of 159.00 set last week.
The single currency had risen to $1.3189 , its highest since early January, before trimming gains to $1.3148.
The Swiss franc was also holding near a six-week high against the dollar .
CARRY STILL IN FAVOUR
Japan's ultra-low rates have spurred market players to use the currency as a source of cheap funds to buy higher-yielding currencies in the carry trade and have prompted many domestic investors to seek better returns in foreign assets.
Swap contracts on the overnight call rate indicate a roughly 60 percent chance of a move, up from a low around 30 to 35 percent last week.
Since the BOJ scrapped its policy of holding rates at virtually zero, the central bank has held them steady for seven months as the economy has fought to pull out of deflation, with core consumer prices barely in positive territory.
After a long-weekend in the United States, investors are eyeing the January U.S. inflation report, also due on Wednesday.
Before that Fed Board Governor Susan Schmidt Bies speaks later on Tuesday.
The market is expecting the Fed to keep rates steady at its March meeting at 5.25 percent and has boosted chances of a June rate cut to 24 percent.
The dollar's fall against the euro follows soft economic data and tamer than expected comments from U.S. Federal Reserve chairman Ben Bernanke last week which revived talk of the Fed coming round to the idea of cutting rates this year.
"Given that markets have started pricing in Fed cuts after the dovish tone from the Chairman Bernanke's semi-annual testimony on monetary policy last week, if Bies provides further confirmation that the Fed has become more relaxed on the inflation outlooks, it could push USD lower," JP Morgan said in a note to clients.
Â© Reuters 2007. All rights reserved.
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