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Dlr climbs above 110 yen on Moody's warning

TOKYO: The dollar climbed to five-month highs against the yen on Thursday, breaking above 110 yen after Moody's Investor Service said it may again downgrade the Japanese government's debt rating.

"Foreign players who have been trying to push up the dollar may use this as an incentive to test the ceiling of the US currency," said Mitsumaru Kumagai, senior economist at the Industrial Bank of Japan.

The US ratings agency said its new review of Japan's domestic rating was prompted by the sharp growth in public sector debt brought on by attempts to pull the economy out of recession.

It noted that the debt load relative to will soon be the highest among the major industrial economies.

Moody's placed on review for possible downgrade the Aa1-rated yen-denominated domestic securities issued or guaranteed by the government of Japan.

But dealers were wary of pushing the dollar far out of range ahead of US Federal Reserve Chairman Alan Greenspan's key congressional testimony later on Thursday, especially in the wake of hawkish comments from senior Fed officials.

"The focus is how US stocks will react as the risks are that Greenspan will hint a more aggressive stance on rate tightening," a dealer at a major city bank said.

The dollar was quoted at 110.08/13 yen, compared with on Wednesday's US close of 109.35 yen. Its high for the day was 110.24 yen.The dollar's gains were also tempered by offers from Japanese exporters near 110 yen, profit-taking and selling to protect options with strike prices near 111.00 and 112.00 yen.

Domestic bond and stock markets showed mixed reactions to Moody's decision.

The yield on the key 220th 10-year cash bond was up 0.55 percent at 1.850 percent in late trade while the benchmark Nikkei stock average ended up 0.98 percent or 192.22 points at 19,791.40.

Tamotsu Yasuda, senior economist at Tokyo-Mitsubishi Securities, said: "I have doubts whether Moody's decision in itself will prompt a weak yen trend because foreigners only a hold a minimal (five to six percent) amount of JGBs. So yen-selling stemming from JGB selling will likely be limited."

Dealers said perhaps equally significant was Moody's decision to change its outlook on Japan's Aa1 foreign currency ceiling to stable from negative.

It said Japan's strong external positions as well as its large pool of domestic savings minimised future risks to foreign debt.

"Moody's decision will likely have little direct impact on currencies, because it won't affect Japanese banks' ability to raise foreign-denominated funds," the city bank dealer said.

The yen also lost ground against the euro, heading above 108.50 compared with Wednesday's US close of 107.88 yen. But selling interest above 108 yen from Japanese investors kept the euro's rise limited.

While the dollar is expected to retain its upward bias against the yen in the near-term, dealers will be closely watching whether Greenspan sends stronger signals to the markets.

Federal Reserve Bank of Chicago President Michael Moskow said the Fed must guard against having too lax a monetary policy as this could boost US economic growth above its sustainable level.

Separately, US Federal Reserve Governor Edward Kelly said in a Nihon Keizai Shimbun interview published on Wednesday that the US growth rate was too high to sustain non-inflationary growth. He said there were no signs of slowdown in the red-hot US economy.

Elsewhere, the euro was little changed against the dollar which closed US trade at $0.9866. Dealers were awaiting the German Ifo business climate index for January, to be released around.

Economists polled by Reuters expect the index to rise to 99.9, compared with 99.6 in the previous month.

European Central Bank will hold its policy decision-making governing council meeting on Thursday.-Reuters