Yen Slips As The Prospect For a Rate Increase Fades

International Herald Tribune, January 17, 2007

NEW YORK -- The yen touched a 13- month low against the dollar Tuesday after the Kyodo News agency reported that the Bank of Japan was "unlikely" to lift interest rates this week.

The report also drove the yen lower against the euro, Canadian dollar and Swiss franc. The Bank of Japan has decided that it must monitor inflation and consumption longer before increasing its key rate from 0.25 percent, according to the report, which cited sources familiar with the matter.

"The yen probably has more downside," said Brian Dolan, research director in Bedminster, New Jersey, for Forex.com, a unit of the online currency trading firm Gain Capital. "The BOJ may hold rates steady this week."

At 4 p.m., the dollar rose to ¥120.64 from ¥120.43 Monday. The euro slipped to $1.2915 from $1.2936. The dollar slid to 1.2486 Swiss francs from 1.2487 francs. The pound dropped to $1.9613 from $1.9641.

Thirty-five of 52 economists surveyed by Bloomberg News had predicted that the Bank of Japan would lift the overnight lending rate by a quarter of a point, to 0.5 percent, at a meeting concluding Thursday.

"The market isn't convinced" about a Bank of Japan rate move this week, said Shaun Osborne, chief currency strategist at TD Securities in Toronto. "You are going to see the yen stay very soft this quarter."

The yen also traded within 1 percent of its weakest level since 1997 against the Australian dollar. The Japanese benchmark rate, the lowest among industrialized nations, is encouraging investors to borrow yen and use the proceeds to buy higher- yielding assets elsewhere. Australia's key rate is 6.25 percent.

The U.S. Federal Reserve has kept its benchmark at 5.25 percent since last June after two years of rate increases. The European Central Bank held its target at 3.5 percent last week after six increases during the past 13 months.

The yield advantage of U.S. 10-year Treasury securities over comparable Japanese government debt is 3.02 percentage points, widening from 2.8 percentage points last month. A larger yield difference dims the appeal of yen-denominated assets.

Euro-yen interest rate futures for March yielded 0.685 percent Tuesday, compared with 0.69 percent Monday, showing reduced bets on a central bank rate increase.

"Most economists believe that the BOJ will hike, but it has suddenly become highly uncertain," said Stephen Malyon, a currency strategist at Scotia Capital in Toronto.

Japanese producer prices rose at their slowest pace in a year in December, gaining 2.5 percent from a year earlier, the Bank of Japan said Tuesday.

Finance Minister Koji Omi said that the government would not stand in the way should the Bank of Japan decide to raise rates this week