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Euro group make gains, yen the main loser

TOKYO: The major European currencies extended their new year rally against both the yen and the dollar on Thursday reaching levels not seen since November.

At the same time the dollar made a fresh six-week high on the yen, with the Japanese currency the butt of broad-based selling as funds unwound Y2K safe haven plays.

"Euro/yen has been the star play. It's broken the 108.15 chart barrier so the skies clear 'till 110.00," said a European bank dealer.

The euro had ascended to 108.19 yen, its best level since November 23, bringing its gains this week to over six big figures or about 5.9 percent.

That in turn gave the dollar a leg up on the yen to stand at 104.33 yen against 104.27 yen in late U.S. trading on Wednesday and just 101.35 at the start of the week.

The yen was also under siege on the crosses, losing around 4.5 percent to the pound this week, five percent to the Swiss franc and 2.6 percent to the Australian dollar.

But equally the dollar was faring no better on the European group, losing three percent to the euro and Swiss franc this week and two percent to sterling.

The euro was finding fresh support in late trade to reach $1.0370 from $1.0314 in late New York on Wednesday with traders tipping another test of $1.0400 near term.

The rally in part reflected jitters in U.S. asset markets. Even though the Dow had bounced on Wednesday, dealers noted the S&P 500 futures contract had fallen 16 points or 1.1 percent today, which was quite a large move for this timezone.

Dealers also detected hedge funds closing out carry trades. These had involved borrowing relatively cheaply in euros and Swiss francs to buy U.S. equities, especially in the NASDAQ. The funds were now taking profits on those equities and paying back the loans, so helping lift the euro and the franc on the dollar, traders said.

Add in the real risk of intervention from the Bank of Japan and speculation the G7 may cobble together some sort of yen-restraining deal when finance ministers meet later this month, and it made a volatile mixture. Intervention unease was stoked by comments from senior Finance Ministry official Haruhiko Kuroda that intervention was conducted with various aims and not always confined to merely smoothing out market movements.

Indeed, dealers have heard whispers the G7 would agree some sort of coordinated policy to restrain the yen including intervention and a round of rate hikes in Europe and the U.S.

But traders found this hard to swallow noting that the U.S. was sticking to the line that Japan had to do more on its own to secure a self sustaining recovery.

And European Central Bank President Wim Duisenberg last year flatly stated the bank would never intervene on the yen without the United States.

There was a real possibility the Bank of England would tighten policy this month and the Federal Reserve in early February, but the ECB looked in no hurry.

On Wednesday Duisenberg predicted EU inflation would peak early this year and taper off afterwards, which, he said, would be no undue cause for concern.

And, in any case, any hikes would clearly be for domestic reasons and nothing whatever to do with the yen, they argued.

The case for a quick tightening in the U.K. was strengthened today with the release of the Halifax house price index for December. This showed annual prices jumped 2.6 percent on the month boosting annual growth to a 10-year high at 13.6 percent.

The Bank of England is known to be highly concerned by house price inflation as it played a major role in the boom and bust of the late 1980's, so analysts felt it would be no surprise if the bank hiked rates at its policy meeting next week.

Sterling was close to nine-week highs at $1.6452 after finishing at $1.6415 in New York on Friday.-Reuters