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Dollar makes strong advance vs yen

NEW YORK: The dollar posted strong gains against the yen and kept a slim lead against the euro on Monday as traders held onto bets that the US economy would outpace growth in Japan and Europe.

The dollar closed nearly 1.5 percent higher against the yen after staging a rally when officials in Tokyo said Japanese growth probably shrank in the October-December quarter.

Economic Planning Agency chief Taichi Sakaiya said on Sunday Japan's gross domestic product (GDP) likely shrank in the final quarter of 1999, pointing to a technical recession following a drop in GDP the previous quarter.

Traders pushed the dollar within sight of a five-month high of 109 yen hit last week, but the dollar ran into solid resistance during New York trade.

"The yen is probably due for a bit of a correction and could get up to 110," said Chris Sippel, senior foreign currency analyst at Standard & Poor's MMS. "But we have to get through technical resistance at 109 first."

Despite the fourth quarter shrinkage, Japan's Sakaiya expressed confidence the economy would pick up in the current quarter and the government would meet its growth forecast of 0.6 percent for the fiscal year ending March 31.

Leading central bankers meeting at the Bank of International Settlements in Switzerland endorsed the view that Japanese economic activity should pick up, according to Bank of England Governor Eddie George -- and some analysts concurred.

"Japan's economic prospects -- fourth quarter aside -- are generally better than they have been in a while," said David Gilmore, partner at FX Analytics.

While the dollar has bounded higher since teetering at the brink of a four-year low just above 101 yen in early January, Gilmore said fundamental factors and capital flows which had pushed the yen to multiyear highs remained intact.

"There is still some repatriation of capital going into the end of the (Japanese) fiscal year in March and global portfolio managers want to participate in the Japanese stock market rally," Gilmore said, predicting future yen strength.

The yen also tumbled against the euro on Monday, but the single currency failed to leverage those gains against the dollar.

The euro dropped nearly half a percentage point against the dollar -- placing it about one US cent above its all-time low of 96.65 cents hit last week -- but then managed to trim most of its losses as downward momentum dried up.

Greg Anderson, currency strategist at FleetBoston, said he expected the euro to remain lodged in a range between 96 and 99 cents for much of this week.

He said euro bulls thought the currency was oversold and sooner or later had to rebound on improved European growth.

On the other hand, Anderson said euro bears were prepared to keep pressure on the currency due to structural concerns over European economies and the seemingly unstoppable momentum of the record US expansion.

"There is little data this week to resolve that tug of war," Anderson said.

Speaking on behalf of key central bankers in Switzerland, the BoE's George said the US boom was "something that cannot go on forever" although there were few signs at present of a slowdown.

On the euro's weakness, George said central bankers had "reasonable confidence the euro had room to appreciate."

The single currency has reached losses of nearly 18 percent against the dollar since its January 1999 launch.

ECB President Wim Duisenberg said last week the weak euro was one factor behind the quarter percentage point increase in euro zone interest rates. -Reuters