960403

Dollar battered

by BOJ remarks

TOKYO: The dollar was battered heavily by unexpected remarks by Bank of Japan Governor Yasuo Matsushita, briefly plunging below 107 yen in late Wednesday trade after hitting a 26-month high of 108.00 yen this morning.

Matsushita said rising interest rates was natural in view of expectations of Japan's economic recovery, which spurred a spate of heavy long liqidations and stop-loss sales.

"The BOJ governor's remarks were unexpected and concrete, which roiled the market," said Ryouhei Muramatsu, foreign exchange manager at Commerzbank in Tokyo.

Matsushita said as long as a rate rise was in line with recovery in companies' estimated profitability, this will not immediately restrict business activity, and economic recovery and rate rises will be able to co-exist. Currency operators who had assumed Japan's low rates could last due to renewed concerns about Japanese banks since last week were caught by surprise by the comments, taken as a sign the BOJ was becoming more tolerant of higher rates, and turned to dump dollars.

The greenback reached 108.00 yen in response to rumours in the late morning that Tokuyo City Bank Ltd faced financial problems, although the bank denied the rumours.

"There was the big assumption that Japan's interest rates would be kept low to help ailing Japanese banks. But this scenario is now collapsing and pressuring the dollar," said a senior trader at a European bank in Tokyo.

Overseas speculators, such as U.S. funds which had borrowed low-cost yen funds and invested them in high-yielding currencies and assets, could be forced to review their strategy if Japan's interest rates are on a real upward trend, he added.

Dealers said Matsushita's remarks reminded them of those by Japanese finance minister Wataru Kubo in February that pensioners were suffering from Japan's low interest rate policy, which had prompted U.S. funds to unwind dollar long positions and invited aggressive intervention by the BOJ.

"I am very careful to see if there will be any negative impact from the BOJ governor's remarks on the U.S. Treasury market," said Commerzbank's Muramatsu. A senior Japanese bank dealer also said Japanese life insurers who had placed bids at 106.80 and 107.20 yen on Tuesday appeared to have held them back, which may drag the dollar down to 106.50 yen overseas.

Dealers said the dollar is likely to go into a 105-108 yen range, with any rise above 108 yen unlikely in the near term.

"All the while, there's been very strong resistance at 108 yen. It's not easy to break this psychological target," said a local bank dealer," said a local bank dealer in Singapore.

Against the mark, the dollar was seen supported at 1.4800 marks for the time being, with any break below taking it to 1.4750, dealers in Singapore said. They said the U.S. non-farm payrolls report due on Friday would remain a focal point for the market in the absence of other news.-Reuter