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Dollar steadies, euro hits record high vs yen

Traders say the dollar will continue to suffer against the euro given that euro rates have been seen soaring this week.

business Updated: Jun 05, 2007 09:31 IST
Naomi Tajitsu

The dollar was little changed on Tuesday after sliding in the previous session, and hovered within range of a 4 1/2-year high against the yen as investors continued to dump the yen for currencies with higher yields.

This nudged the euro up to a record high of 164.40 yen as investors remained keen to use the Japanese currency, which yields a paltry 0.5 percent, to fund higher-yielding investments as part of carry trades.

Meanwhile, traders said the dollar would continue to suffer against the euro given that euro rates are seen rising this week.

Market participants brushed off a 5 per cent fall in Shanghai equities, which extended losses following a tumble of more than 8 per cent on Monday.

Traders said the recent round of Chinese equity losses was not enough to spur a global slide in a repeat of a sell-off in February, when stock losses prompted investors to trim risk exposure, igniting a round of yen short covering to unwind carry trades.

"So long as the effect of Chinese stock losses don't trickle into global markets, they will probably have limited impact on the yen," said Masafumi Yamamoto, currency strategist at Nikko Citigroup.

Koji Fukaya, senior currency strategist at Deutsche Bank, said losses in Chinese stocks this time were unlikely to affect US stocks as they had in February because the US economic outlook had improved since then, supporting equity prices.
For its part, the Nikkei stocks average ended the morning session 0.5 percent higher on Tuesday.

More Yen losses

The dollar steadied after slipping on Monday, when it was unable to hold onto a four-month high hit against the yen and a two-month peak versus the euro late last week after strong U.S. jobs data made it less likely the Federal Reserve will cut rates this year.

It was little changed at 121.70 yen after slipping to 121.55 yen in the previous session and it edged away from 122.14 yen touched late last week for the first time since late January.

Traders said despite the dollar's slip on Monday, it was only a matter of time before it makes a sustained climb above 122.00 yen and rises beyond the psychologically crucial 122.20 yen level, which would be its highest since December 2002.

"It may take some time ... but ultimately, yen selling is bound to continue," said Takehiko Jimbo, forex manager at Mitsubishi UFJ Trust and Banking.

The euro was unchanged at $1.3495 pulling away from a near two-month low of $1.3392 hit last week.
The Japanese currency hovered near its lowest levels in around 15 years hit versus sterling and the Australian and Canadian dollars on Monday, as well as a 17-year trough touched against the New Zealand currency in the previous session.

Analysts say the yen will be in for more losses against those higher-yielding currencies even as the Bank of Japan is seen lifting rates as early as in August, given that rates in those countries are also expected to rise sometime in the near future.

The heads of the world's top three central banks -- Federal Reserve Chairman Ben Bernanke, European Central Bank President Jean-Claude Trichet and BOJ Governor Toshihiko Fukui -- will discuss "Housing and the Economy" in a satellite discussion later in the day, but few expected it would impact currencies.

Traders awaited a rate announcement by the European Central Bank on Wednesday, when it is widely expected to lift rates from 3.75 per cent. The market will be waiting to see if the ECB signals more rises to come, which would further boost the euro.

The Reserve Bank of Australia will also make a decision on rates on Wednesday, while the Bank of England and the Reserve Bank of New Zealand will issues policy statements on Thursday.

All three central banks are seen holding rates steady this week, but market participants expect they will maintain their rate-tightening biases.