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Monday July 2, 2007 - 10:35:27 GMT
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FOREX NEWS-Yen gains vs euro, dollar but more weakness seen

FOREX-Yen gains vs euro, dollar but more weakness seen
Mon Jul 2, 2007 4:18 AM ET

(Changes dateline, byline, updates prices, adds quotes)

By Toni Vorobyova

LONDON, July 2 (Reuters) - The yen ticked up against the euro and the dollar on Monday, supported by expectations that Japanese investors will repatriate money, but analysts said the low-yielding currency was unlikely to be well-bid for long.

The Bank of Japan's quarterly tankan poll was in line with forecasts, supporting the view that the BOJ will raise interest rates very gradually from the current 0.5 percent.

That leaves the yen as a very attractive currency to borrow to fund higher-yielding investments. Such carry trades helped to send the yen to 4-1/2 year lows versus the dollar and record troughs against the euro last month.

In the short term though, Japanese investors are expected to repatriate some cash from the euro zone, where a bumper 29.5 billion euros' worth of bond redemptions and a further 14.5 billion euros of coupon payments are due this week.

Overstretched positioning -- with speculative yen shorts hitting record highs according to the latest weekly data from the Commodity Futures Trading Commission -- also helped the yen.

"Yen shorts are at record highs, so some profit taking ... is not too surprising. There are massive redemptions (bond) this week in the euro zone while net issuance is very weak and this suggests that probably there will be some repatriation into yen," said Michael Klawitter, currency strategist at Dresdner Kleinwort in Frankfurt.

"But does it really change the overall view that the yen remains weak? Probably not. Any correction ... will only allow market participants to find more attractive levels to re-enter yen shorts," he added.

By 0747 GMT, the dollar was down 0.4 percent at 122.63 yen, after hitting 4-1/2 year peaks of 124.16 in June according to Reuters data .

The euro was down 0.3 percent at 166.29 yen .

Investors were also reluctant to sell the yen further as this is a short week, with U.S. markets closed on Wednesday for Independence Day.

However, high-yielding currencies fared well, suggesting that it may not be too long before investors re-enter yen-funded carry trades.

Sterling hit a 2-1/2-month high versus the dollar at $2.0128 , inching towards a 26-year high before a widely expected Bank of England interest rate increase to 5.75 percent on Thursday.

Traders said an incident in which a burning vehicle was driven into the main terminal at Glasgow's airport at the weekend, which followed a thwarted bomb plot involving two cars in central London late last week, was having no real impact in the market so far on Monday.

The Australian and New Zealand dollars, with interest rates of 6.25 and 8.0 percent respectively, were both up around 0.7 percent versus the U.S. currency, setting fresh multi-year highs.


The gains in Aussie and sterling also dragged up the euro versus the dollar, traders said, to $1.3563 .

Data showing the euro zone manufacturing PMI rising to a four-month high of 55.6 in June -- slightly higher than the flash estimate -- backed expectations of further euro zone rate increases in the coming months.

Demand for the dollar has been waning since Thursday, when the Federal Reserve left interest rates on hold and said core inflation had eased a bit, boosting the view that U.S. overnight rates will remain at 5.25 percent for some time.

"The dollar has been slipping versus the euro since last week, and this week's biggest risk will be for that to continue," said a trader at a Japanese bank.

He added that euro gains versus the dollar may help to pull European currencies even higher against the yen.

The break in the dollar index <.DXY> below technical support at 82 last week was likely to accentuate the weakness in the greenback this week.

Further direction could come from the Institute for Supply Management's manufacturing survey for June due later on Monday.

© Reuters 2007. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world.


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