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Wednesday February 21, 2007 - 09:01:32 GMT
Reuters - www.reuters.com

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FOREX-Yen slides as BOJ seen moving slow after rate rise

FOREX-Yen slides as BOJ seen moving slow after rate rise
Wed Feb 21, 2007 3:32am ET

By Rika Otsuka

TOKYO, Feb 21 (Reuters) - The yen slid against the dollar and euro on Wednesday despite the Bank of Japan raising interest rates to a decade-high 0.5 percent, hurt by the view the central bank would take a while before boosting rates further.

The yen initially surged after media reports that BOJ Governor Toshihiko Fukui had proposed a rate increase, prompting a flurry of investors to reverse their yen short positions.

But once the BOJ announced its decision to raise rates, the yen's gains were limited and it quickly reversed course as market players doubt the move would do much to shore up the Japanese currency, which has suffered from its low-yielding status.

Some analysts said the lone dissent of Deputy Governor Kazumasa Iwata against the rate rise would make it difficult for the BOJ to move again anytime soon, especially with core inflation still barely rising.

Luke Waddington, head of forex trading at Royal Bank of Scotland in Tokyo, said that in the past day or so many market players had come around to the view that a BOJ rate rise would do little to prompt a sustained yen rally.

If Japanese investors keep buying higher-yielding foreign currencies after the BOJ rate hike, "people will just carry on with the carry trade," he said.

Japan's ultra-low rates have spurred market players to use the yen 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.

The dollar rose on the day by 0.4 percent to 120.45 yen , rebounding from a session low of 119.71 yen. Traders said there was strong demand for dollars at the lows, partly from Japanese individual investors.

The euro climbed 0.5 percent 158.45 yen , up from lows around 157.30 yen and pushing back towards a record high of 159.00 yen struck last week.

The high-yielding Australian and New Zealand dollars, the most popular for carry trades, scored the biggest gains against the yen.

The single European currency edged up slightly to $1.3155 , pushing back towards a six-week high of $1.3190 hit earlier in the week.

The BOJ had held rates at 0.25 percent for the past seven months due to weak consumer spending and core consumer prices hardly rising. Market views were divided until the last minute on whether the central bank would raise rates this week.

After the meeting, Fukui repeated that rates would rise slowly. He also said not all aspects of the yen's weakness can be described as a distortion but an excessive build-up of yen carry trades may hurt the economy.

Investors increasingly believe the yen will continue to struggle with rates so much higher at 5.25 percent in the United States and likely to rise to 3.75 percent in the euro zone next month.

DOLLAR'S OWN STRUGGLES

Despite Wednesday's rise in the dollar against the yen, analysts said the dollar would still struggle against other currencies on mounting expectations for the Federal Reserve to cut rates later this year.

"Once the market digests the BOJ's rate hike, its main focus will shift to the U.S. economy," said Yuji Kameoka, a senior economist at Daiwa Institute of Research. "Factors in the United States will decide a trend for the dollar/yen from now on."

Investors will look at key U.S. consumer price data and minutes from the Fed's Jan 30-31 meeting due later in the session for more clues about inflationary pressures.

The Bank of England will also releases minutes from its Feb. 7-8 policy meeting at 0930 GMT. The BoE left rates on hold at 5.25 percent at that meeting, but the minutes will be closely scrutinised for clues on whether the central bank is likely to lift rates again. (Additional reporting by Eric Burroughs.)

© Reuters 2007. All Rights Reserved.

 

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