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Dlr steady, dealers shaken by Treasury flap

TOKYO: The dollar was mostly steady against the yen and euro in late afternoon trading on Friday and stuck in a narrow trading range as dealers tried to make sense of volatile swings in the US Treasury market.

"I think traders are having a hard time comprehending what's happening in the United States and its implications for the foreign exchange market," said Shuji Kawanabe, vice president at JP Morgan.

"The uncertainty is making dealers reluctant to trade and has caused liquidity to fall, making the market more susceptible to moves based on commercial flows," Kawanabe said.

Dealers said they were unnerved by overnight rumours, later denied, of a special emergency meeting by the New York Federal Reserve which had dampened sentiment towards the dollar.

The dollar also came under pressure after Eiko Shinotsuka, a member of the Bank of Japan's Policy Board, said on Friday the time was ripe to end the central bank's year-old zero interest rate policy.

But the greenback was supported by bids by Japanese investors seeking to reduce hedge ratios against their dollar assets, dealers said.

The dollar stood at 107.63/66 yen against 107.56 yen in late US trading on Thursday.

The euro stood at $0.9891/95 against $0.9900 in late US trading. The talk of losses at hedge funds and financial institutions due to a sharp decline in US 30-year bond yield was deflecting attention from US jobs data for January, due for release, dealers said.

US economists in a Reuters poll forecast, on average, a decline in nonfarm payrolls to 255,000 in January from 315,000 in December.

They also forecast the jobless rate, already at a 30-year low of 4.1 percent, would show a further decline to 4.0 percent.

"All these odd movements of US Treasury prices across the yield curve over the past few weeks cannot be explained by fundamentals at all," said a hedge fund manager.

"Huge losses incurred on arbitrage deals by one or more hedge funds and investment banks must be involved," he said.

But traders said it was difficult to discern exactly how the foreign exchange market would be affected.

"The dollar's decline overnight in the wake of rumours about hedge funds in trouble has been a bit puzzling, because earlier in the week, hedge funds suffering losses were said to be buying dollars to repatriate their profits," said a city bank dealer.

An analyst for a major Japanese brokerage said dollar buying for fund repatriation was likely to continue, but added that recent renewed buying of Japanese stocks by foreign investors could offset some of the impact on the yen.

Dealers said the dollar's fall probably had more to do with a continuation of profit-taking after its rise to five-months highs above 109 yen on Wednesday, as well as a rebound in the euro.

"I wouldn't recommend taking positions based on rumours of troubled institutions or hedge funds, because it's hard to tell what positions they need to liquidate, if any," said JP Morgan's Kawanabe.

The euro was boosted overnight by a credit-tightening by the European Central Bank, which surprised a majority of dealers, as well as news that Vodafone AirTouch Plc had succeeded in its 180 billion euro bid for German telecommunications group Mannesmann AG. "Credit-tightenings in the euro zone and Switzerland have spurred some speculation that European monetary authorities may take further measures to defend their currencies and spurred profit-taking in the dollar," said Kazuteru Hasegawa, head of foreign exchange at Bank of America in Tokyo.

As result, the greenback has retreated against the yen as well, he said.

"But in the short term at least, I think the dollar's falls will be limited and that it will trade in a range of 106.50 yen to 108.50 yen," Hasegawa said. Currency bid prices. All data taken from Reuters with percent change calculated from the daily US close-Reuters