Wednesday February 21, 2007 - 11:39:58 GMT
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Reuters - www.reuters.com
FOREX-Yen eyes record low vs euro on BOJ outlook
LONDON, Feb 21 (Reuters) - The yen fell broadly on Wednesday, inching closer to a record low against the euro after the Bank of Japan said it would gradually raise interest rates further after increasing them to a decade high of 0.5 percent. The yen quickly wiped out initial gains made just before the BOJ announcement as Governor Toshihiko Fukui cautioned on future increases, saying the central bank would raise rates slowly and gains in consumption would be only modest.
Investors doubt the BOJ could move again soon, especially with core inflation still barely rising.
"Now there is a certainty that the BOJ will not hike rates any time soon, the yen is once again a sell... At a time when global risk appetite remains at a very high level, where is the reason for investors not to continue playing the carry?" said Michael Klawitter, currency strategist at Dresdner Kleinwort.
By 1055 GMT, the dollar had risen 0.75 percent to 120.85 yen , this week's high.
The euro climbed as high as 158.92 yen , closing in on a record high of 159.00 set last week after Group of Seven financial chiefs made no explicit mention of the yen's weakness.
As carry trades -- where investors borrow the yen cheaply to fund higher return investments -- received a new surge of popularity, the yen hit three-week lows versus the New Zealand dollar , the highest yielder among major currencies.
The kiwi also hit seven-week highs versus the U.S. currency .
Adding to the appeal of carry trades were comments from Reserve Bank of Australia Governor Glenn Stevens who said rates were more likely to rise than fall in the months ahead.
His comments boosted the Australian dollar to one-month highs versus the yen and the U.S. dollar .
Australia's rates are already at 6.25 percent, the second highest in the industrialised world after New Zealand.
In contrast expectations of a near-term rise in UK rates were knocked by the relatively balanced tone of Bank of England minutes of its February meeting, leading to a sell-off in sterling .
GOLDILOCKS KEEPING FED ON HOLD?
The euro was steady at $1.3145 before U.S. inflation data for January at 1330 GMT and minutes of the Federal Reserve's latest meeting at 1900 GMT.
Core consumer prices are expected to have risen 0.2 percent on the month and 2.6 percent on the year, with the annual rate unchanged from December.
Many investors think the United States is heading for a "goldilocks" scenario where inflation pressures moderate while economic growth slows gently. That would probably prevent the Federal Open Market Committee (FOMC) from moving rates in either direction from the current 5.25 percent.
"January U.S. core CPI should continue to linger above the Fed's comfort zone and won't change the view that the Fed will be on hold for a longer period of time," Commerzbank Corporates & Markets said in a research note.
"The FOMC minutes from Jan. 31 will confirm this view, since they are likely to underline growth at a 'moderate pace' and slowly moderating inflation, whilst noting the slight risk of inflationary pressures ... Overall, nothing new of support for the dollar."
Â© Reuters 2007. All Rights Reserved.
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