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Euro benefits as conspiracy theories abound

TOKYO: The euro won a rare lift on Thursday as the market's imagination worked overtime ahead of a key European monetary policy meeting later in the ay.

Dealers said a listless session had been livened by a spate of conspiracy theories, the favourite being that the Bank of Japan was ready to capitalise on a possible rate hike from the European Central Bank by intervening to drive the euro up.

The talk was fuelled by a late burst of euro buying from a circle of Japanese banks that some suspected might have been intervention. And it did help lift the euro to the day's high at 102.63 yen compared with 101.73 in New York.

Traders even reported whispers the Bank of England would join the intervenion to push sterling down against the euro.

And the whole tale was embellished with the suspicion that because Hurihiko Kuroda, the Japanese Finance Ministry's forex chief, happened to have been in France for an OECD meeting, he must have met someone from the ECB to chat on intervention.

"Yes, I suppose if the ECB does hike, and that's far from a foregone conclusion, it could be seen as a wondow of opportunity for the BOJ," said a European bank dealer.

"But to suggest that the ECB or the BoE would join in is sheer fantasy. That's someone talking their book," he added.

Nevertheless, the market was tense enough that the euro did rise on the dollar to $0.9691 from $0.9672.

That was no help to the US currency, which was idling at 105.64 yen from 105.64 late in New York.

And both the euro and the dollar remained short of Wednesday's post-intervention highs of 102.95 and 106.25 yen, a sobering performance given dealers estimated the BOJ had bought at least $5 to $6 billion on Wednesday.

Traders did note say the BOJ had intervened in euro/yen during European hours last week, but suspected it was only because it believed the ECB to be unwilling to act on their behalf.

On Wednesday, Finance Minister Kiichi Miyazawa flatly denied that Japan would ask for ECB assistance, saying that action in Tokyo alone had been effective.

Furthermore, analysts noted that the ECB had repeatedly ruled out intervention with Japan alone. In December, ECB President Wim Duisenberg stated the bank would never intervene on the yen without the participation of the Federal Reserve.

And there was absolutely no sign of the US agreeing to weaken the yen so Japan could be even more competitive.

Indeed, US trade data out on Wednesday showed the current account deficit blew out to a record $99.8 billion in the fourth quarter. The full year shortfall ballooned 54 percent to $338 billion or 3.8 percent of gross domestic product.

"I can just see the Treasury agreeing to push the yen lower so Japan can export more to the States," said a US bank dealer with more than a small trace of sarcasm.

And even if the ECB were to hike rates, analysts doubted it would provide lasting support to the euro, particularly when it came to the yen.

"Rate differentials haven't been a big determinant for the yen for a long time," Marshall Gittler, head of global currency risk at Bank of America in Hong Kong, told Reuters Television.

He pointed out that the opposite had been the case in recent time, with the yen actually rising when yield differentials widened against Japan.

Instead, traders were focused on talk Japanese institutions had a real need to hedge their foreign currency exposure ahead of the looming fiscal year-end and were praying for intervention to give them better levels to sell.

"There's supposed to be a wall of offers from these guys up above 103.00 on the euro and 106.30 on the dollar," said the US bank dealer. "Even if the ECB does hike and the BOJ does step in, we still can't see the euro getting much higher." -Reuters