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Dollar not expected hit

110 yen soon, say dealers

TOKYO: Jitters about Japan's financial system and a host of other factors are supporting the dollar, but they will not be enough to boost it to a key level of 110 yen anytime soon, Tokyo dealers said on Tuesday.

"Basically, the dollar remains firm. But there won't be a sharp rise -- maybe two steps forward and then a step back," said Hitomi Yokoyama, senior dealer at Chemical Bank in Tokyo.

After hitting a 26-month high of 107.70 yen on Monday, the dollar was standing at 107.42 yen in late Tokyo trade on Tuesday. The recent rise was fuelled by news of further troubles in the Japanese banking sector.

Over the weekend, Japan's Finance Ministry announced the liquidation of Taiheiyo Bank, a regional bank. Then the Long-Term Credit Bank of Japan (LTCB) said on Monday morning that U.S. authorities were probing its New York-based unit for improper deals by a local trader.

Many dealers said these incidents reminded them of last August's liquidation of Hyogo Bank, which was quickly followed by news that Daiwa Bank had suffered huge losses on unauthorised bond deals by one of its New York traders.

At the same time, worries over the financial industry gave the market reassurance that there would be no imminent rise in Japanese interest rates.

"Authorities here want to keep rates low to restore health in the banking system," Larry Duke, vice president at Citibank, told Reuters Financial Television.

"They're evidence that Japanese authorities cannot raise rates. And that's good for the dollar," said Youichi Itoh, deputy general manager at Sumitomo Trust & Banking.

But dealers said the latest concerns over the banking system would not spark an exodus from yen-based assets.

"Although overseas operators have doubts, they're using it more as an excuse for their speculative yen sales," said Manabu Nakagawa, chief dealer at the Bank of Nova Scotia.

Dealers also said a dollar ascent to 110 yen was unlikely in the near term in the face of a shaky U.S. bond market.

Many said that following the dollar's recent rises, market participants might sell dollars ahead of the release of March U.S. jobs data on Friday, to prepare for any surprises.

They added that the outlook for the U.S. Treasury bond market hinged on the employment figures. February jobs data showed an improvement that was far beyond expectations, sending bond prices plummetting.

"But if Treasuries rise on the jobs data, then the dollar would also gain from that," said Chemical's Yokoyama.

Dealers also said that if the U.S. bond market stabilises after the jobs figures, it may invite Japan's institutional investors to invest in foreign bonds, which would lift the dollar some more.

There were expectations that amid low interest rates at home, Japanese investors might beef up overseas investments in search of high returns with the start of the new fiscal year on Monday. But no major moves in that direction have been seen.

Dealers also said sales from Japanese exporting companies would slow down any advances by the dollar. Companies which export their products need to convert into yen the dollars they acquire through overseas sales of their goods.

"It's taking so much energy for the dollar to break the 108 yen level. The dollar won't hit 110 yen in a month's time," said Sumitomo Trust's Itoh.

Chemical's Yokoyama, meanwhile, sees the dollar rising to 108.50 yen at the most in the next four weeks.-Reuter