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Dollar powers above Y109, then stalls

TOKYO: The dollar powered to a fresh five-month high against the yen in late Tokyo on Tuesday as the yen struggled amid growing worry over the outlook for Japan's economy, dealers said.

The yen continued to be dragged down by a bearish mood that set in when Economic Planning Minister Taichi Sakaiya said on Sunday that gross domestic product probably contracted for the second quarter in a row in the October-December period.

Although efforts by top Japanese officials to soothe concerns about the potential for the economy to turn sickly temporarily slowed down the pace of the dollar's rise against the yen, many operators were eager to test it above 110 yen in the near term.

"The dollar's decisive break above 109 yen appears to be drawing more dollar bids, especially from foreign investors," a Japanese trust bank trader said.

He said said Sakaiya's comments came at a time when sentiment for the dollar was improving, which encouraged foreign operators to bid further on the outlook for the economy.

The greenback climbed as high as 109.45 yen. It initially picked up momentum after hitting stop-loss orders placed at 109.10 yen in the morning, dealers said.

But it struggled to extend its advance, pressured by sporadic sales by exporters and profit-taking after a series of comments by Japanese officials gave exporters and profit-takers chances to sell dollars around 109.50 yen.

Finance Minister Kiichi Miyazawa told a regular news conference: "As a general trend, Japan's economy is expected to improve despite fluctuations."

His comments were echoed by Sakaiya's fresh comments on Tuesday: "The decline in October-December is due to a temporary fall in consumer spending in December."

The dollar was quoted at 109.35/38 yen compared with Monday's US close of 108.67 yen "It's difficult to turn around the current dollar-buying mood. There are plenty of Japanese investors and US fund operators waiting to buy dollars on dips," a Japanese city bank dealer said.

Japanese investors were rumoured to be unwinding their large hedge positions against their holding of dollar-based assets. Meanwhile US funds were increasing their hedge ratios against their Japanese stock holdings given the yen's fall, dealers said.

"At the beginning of the year, Japanese investors had increased their hedge ratio on the belief that the yen would appreciate beyond 100 yen," the city bank dealer said. "But given the yen's recent downward trend towards 110 yen, they are busy unwinding their positions, buying back the dollar."

The yen also remained under pressure in cross trade, which indirectly helped the dollar against the yen.

Sterling has jumped sharply against the yen in the last two days, a rise triggered by media reports that Japan's NTT Docomo was considering a bid for Orange Plc worth as much as $35 billion.

Sterling was also buoyed on speculation the Bank of England will raise short-term interest rates. The BOE's Monetary Policy Committee will meet on Wednesday and Thursday.

The euro moved in tight ranges against the dollar EUR, hovering near $0.9812/14 compared with Monday's US close of $0.9808.

Dealers will be closely watching German unemployment figures to be released.

The chairwoman of the board of the German Federal Labour Office said on Monday she expected German jobs data to show a rise in unadjusted unemployment of less than 260,000, lower than forecast.

Economists polled by Reuters forecast the seasonally unadjusted numbers would rise by around 300,000 to give a January rate of between 10.8 and 11 percent. Currency bid prices. All data taken from Reuters with percent change calculated from the daily US close -Reuters