Posted on 11/28/2005 3:14:40 AM PST by RWR8189
LONDON (Reuters) - The dollar hit a 27-month high against the yen on Monday and edged closer to recent two-year lows versus the euro and sterling as greenback buying on yield advantage gathered momentum after a long U.S. weekend.
In the absense of major data on Monday, investors, coming back from the Thanksgiving holiday weekend, pushed the dollar higher in anticipation of further rises in U.S. interest rates.
The euro kept a low profile as investors awaited European Central Bank speakers including chief Jean-Claude Trichet ahead of a widely-expected 25 basis point rate hike this week.
But the outlook beyond this week's rate hike remains unclear with Eurogroup Chairman Jean-Claude Juncker saying there was no need for an ECB rate hike as it could further damage weak consumer confidence.
In Japan, the central bank is not expected to raise interest rates above near-zero percent any time soon with politicians also cautioning against a premature move by the Bank of Japan.
"The U.S. economy is still looking solid and further Fed rate hikes are around the cornder. Bullish dollar sentiment is intact as U.S. traders come back after the long weekend," said Carsten Fritsch, currency strategist at Commerzbank in Frankfurt.
"There is a suggestion the ECB may still lag the Fed in terms of tightening. Interest rate differentials may widen in the next 1-3 months even with the ECB's hike in December. The yen is even more vulnerable in an environment where interest rate differentials are the major driver of the market."
By 0900 GMT the dollar had risen to a high of 119.93 yen , its highest since August 2003, extending this year's gain to more than 17 percent.
Against the euro the dollar was up 0.3 percent at $1.1682 , around half a cent away from a two-year high set earlier this month.
"A U.S. investment bank is buying a lot of dollars, targeting $1.1640. It's a continuation of last week's move," a UK bank trader said.
WIDENING DIFFERENTIALS
The ECB is expected to raise its key rate by 25 basis points to 2.25 percent on Thursday, the first increase in five years.
But ECB officials have signaled that they are not planning an aggressive tightening campaign.
In Japan, Hidenao Nakagawa, the powerful policy chief of the ruling Liberal Democratic Party, was the latest to oppose a BOJ policy shift, saying on Monday that the country had yet to beat deflation.
"Japanese politicians are keen to stress that the deflation still persists. A dispute between the BOJ and the government does not bode well for the yen," Fritsch said.
The BOJ has said the possibility of a shift in the current policy will grow over the course of next fiscal year starting April.
The yen's fall comes despite Tokyo stocks hitting a five-year high and data pointing to an economic recovery.
The Japanese currency has failed to benefit as foreign buying of Japanese stocks has been outweighed by hefty purchases of foreign bonds by Japanese investors in search of higher yields.
Such outflows helped to drive the yen to a 13-year low against the Canadian dollar and an eight-year trough versus the New Zealand dollar on Monday.
"It's so easy for market participants to sell the yen," said Kikuko Takeda, currency analyst at Bank of Tokyo-Mitsubishi in Tokyo.
For clues about how long the Fed will keep hiking rates to repel inflation worries, investors are eyeing a slew of U.S. economic reports due this week.
Revised growth data for the third quarter, the core PCE price index -- an inflation gauge watched closely by the Fed -- the Institute for Supply Management manufacturing report and the payrolls report are all slated to be released this week.
"Dollar buying could be reheated if the economic data supports the view that the Fed will continue to increase interest rates," said Hiroki Shimazu, a market economist at Mizuho Securities.
On Friday and Saturday, the Group of Seven finance ministers and central bank governors will meet in London to discuss currencies and the global economy.
sure hope that Buffet and Soros are losing another 100 million on their bet that the dollar would drop. I also hope that Chavez is now eating a smaller stake as his euro based oil pricing is going down the tubes.
I imagine these gentlemen hedged their positions--for you can open or close your accounts with a simple mouse click.
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