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Dollar trapped vs yen, euro looking fragile

TOKYO: The dollar was stuck in tight ranges against the yen in afternoon Tokyo on Thursday as traders awaited key US data, while the friendless euro looked at risk of testing new lows.

Dealers said the market was expected to remain mostly steady until the release of US economic indicators on Friday and the Federal Reserve's policy-setting meeting early next month.

"The forex market is interested in how the asset markets, such as the stock market, will react to US monetary policy," said a trust bank dealer, adding that Friday's employment cost index (ECI) and gross domestic product data would provide clues to how aggressively the US Federal Reserve will tighten credit this year.

The Fed is widely expected to raise its key short-term interest rate by 25 basis points when its policy-setting Federal Open Market Committee meets on February 1 and 2.

For the most part, trading on Thursday was driven by options-related activity, with the dollar boxed between around 105.50 yen and 106.50 yen.

The greenback stood at 105.64/68 yen versus 105.69 yen late Wednesday in New York.

Dealers expected the euro to slide further in the near term, amid scepticism that European central banks would take action to halt the currency's fall.

The euro stood at $0.9999/02, after briefly slipping to $0.9995 earlier, matching the overnight New York low. It had traded at $1.0009 in New York late on Wednesday.

Against the yen the euro was quoted at 105.55/65 from 105.83 in late US trade.

The trust bank dealer said the dollar was being supported by rate hike expectations.

"It is of no surprise that money is flowing into the dollar, because a US rate hike will expand interest rate gaps, making the dollar more attractive," the dealer said.

Regarding the euro, traders said it is only a matter of time before the single currency slides to around $0.9970 or lower, since its sojourns below dollar parity are becoming longer.

"The fact that European authorities do not try to stem the euro's fall explains that in truth, they accept its weakness and intend to keep it that way until the region's economic recovery strengthens further," a city bank dealer said.

German Finance Minister Hans Eichel said on Wednesday that the present euro exchange rate was "all right" and would only pose a problem if it fuelled inflation.

The dollar found some support against the yen on growing political uncertainty in Tokyo.

The greenback was partly supported by Japan's opposition parties' decision to boycott parliamentary discussions, which raised concerns over possible delays in the passage of the state budget for the fiscal year starting in April.

On Wednesday, Japan's ruling coalition pushed a controversial bill to cut 20 of the Lower House's 200 proportional representation seats through a Lower House panel, despite an opposition threat to boycott all parliamentary debate including that on next year's budget.

Buying related to setting up of fresh investment trust funds also gave the greenback solid support, dealers said.

Currency bid prices. All data taken from Reuters with percent change calculated from the daily US close.-Reuters