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Dollar at 5-month highs vs yen ahead of FOMC

TOKYO: The dollar was perched near five-month highs against the yen in afternoon Tokyo trade on Wednesday, as the market put its trust in the US Federal Reserve ahead of a policy-setting meeting later in the day.

The US currency jumped to a peak of 109.06 yen, its highest since September 13.

Dealers said the dollar was buoyed by expectations the United States would be able to gradually ease its economic expansion, which entered the record books on Tuesday as the longest ever, starting its 107th month of unbroken growth.

The Federal Open Market Committee (FOMC) is widely expected to sanction a 0.25 percentage point rise in its target for the key 5.5 percent federal funds rate, with some expecting a similar rise in the 5.0 percent discount rate.

"A 25 basis-point rate hike and a statement mentioning the risk of inflation have been factored into the market," said a Japanese city bank dealer.

"A 50 basis-point hike would be a surprise, but the market feels that if it's (Fed Chairman Alan) Greenspan's decision, things will be all right."

The FOMC is expected to announce its decision around.

The dollar was quoted at 108.70/75 yen, compared with 107.79 yen in New York late on Tuesday.

The greenback also overshadowed the euro which eased slightly to $0.9706/09, compared with $0.9721 in late US trading on Tuesday.

Dealers said Japanese investors continued to unwind dollar hedges after watching the currency jump past 108.50 yen at mid-afternoon.

There was also persistent talk that some troubled hedge funds were liquidating overseas assets to raise cash.

"I don't know whether those hedge fund rumours are true or not, but dollar selling by Japanese exporters recently has been overwhelmed by dollar buying by offshore players," a European bank dealer said.

Exporters were mostly sidelined on Wednesday, waiting to see how far the dollar would rise, while technical indicators were bullish for a push to 109.15 yen and perhaps to 110.25 yen.

"Exporters took a wait-and-see stance, leaving the market at the mercy of interbank dealers," said another city bank dealer.

"There are more stop-loss orders above 109 yen and there are still players who need to buy dollars, so I would not be surprised if those levels are breached in London and New York trade."

Some dealers and analysts said that even though fundamentals for the time being pointed to a strong dollar, the ailing euro could come to a turning point later this week if the European Central Bank (ECB) raises rates at its policy-setting meeting on Thursday.

"The ECB's decision on Thursday has the potential to shake up euro/dollar directly and dollar/yen indirectly," said Takashi Ueno, general manager of investment strategy at Tokyo-Mitsubishi Securities.

"There is a chance that the ECB will hike interest rates by 25 basis points, and that will turn out to be a positive surprise for the euro."

In a Reuters poll of 41 economists, 36 expect higher euro zone interest rates within the next two months.

Dealers in Tokyo said the single currency has been languishing at record lows on scepticism over Europe's economic recovery, and worries of inflation as well as high labour costs could prompt the ECB to tighten its monetary policy. Dealers said Japanese investors continued to unwind dollar hedges after watching the currency jump past 108.50 yen at mid-afternoon.

There was also persistent talk that some troubled hedge funds were liquidating overseas assets to raise cash.

"I don't know whether those hedge fund rumours are true or not, but dollar selling by Japanese exporters recently has been overwhelmed by dollar buying by offshore players," a European bank dealer said.

Exporters were mostly sidelined on Wednesday, waiting to see how far the dollar would rise, while technical indicators were bullish for a push to 109.15 yen and perhaps to 110.25 yen.

"Exporters took a wait-and-see stance, leaving the market at the mercy of interbank dealers," said another city bank dealer.

"There are more stop-loss orders above 109 yen and there are still players who need to buy dollars, so I would not be surprised if those levels are breached in London and New York trade."-Reuters