Yen slips after the Bank of Japan holds steady on interest rates

Bloomberg News, Published: November 14, 2007

NEW YORK: The yen fell Tuesday against the 16 most-actively traded currencies as the governor of the Bank of Japan, Toshihiko Fukui, gave no indication of when the central bank would increase interest rates following a policy meeting.

The drop started after Prime Minister Yasuo Fukuda warned about the pace of the yen's advance during an interview published by The Financial Times newspaper and accelerated Tuesday after the central bank held its overnight lending rate at 0.5 percent, the lowest rate among major economies.

"It is very hard for the BOJ to raise interest rates," said Samarjit Shankar, director of global strategy for the global markets group in Boston at Bank of New York Mellon. "If they raise rates, it will further encourage yen buying, which may hurt exporters and growth."

The euro is likely to rise as high as $1.50 and the dollar to fall to ¥105 before the end of the year, according to Shankar.

The dollar rose Tuesday to ¥110.925 from ¥109.645 on Monday. The euro rose to $1.4603 from $1.4538. The pound rose to $2.0701 from $2.0560. The dollar fell to 1.1272 Swiss francs from 1.1291 francs.

The dollar has weakened 4.2 percent against the euro and 4.8 percent versus the yen after the Federal Reserve cut interest rates for the first time since 2003 on Sept. 18.

The Federal Reserve further reduced its target overnight lending rate between banks to 4.5 percent on Oct. 31.

Interest-rate futures traded on the Chicago Board of Trade show 86 percent odds that the U.S. central bank will cut again in December.

The European Central Bank's rate is 4 percent.

U.S. stocks traded sharply higher Tuesday, suggesting a decline in risk aversion as investors returned to higher-yielding assets.

"You are going to see a continuation of a swing in the markets until we get a clear idea about the subprime issues," said Brian Taylor, chief currency trader at Manufacturers & Traders Trust in Buffalo, New York. "When risk aversion subsides a bit, people get back to sell yen and buy higher yielders. When risk aversion rises again, the move will quickly reverse."

The pound rose after the British inflation rate accelerated to an annual 2.1 percent rate in October, above the Bank of England's 2 percent target, reducing speculation of an interest-rate cut from the current level of 5.75 percent.

The euro is expected to trade at $1.44 by year-end, according to the median forecast of 41 analysts and brokerage houses surveyed by Bloomberg News.

Kim-Mai Cutler reported from London.