Dollar weakens against yen

Tokyo - The dollar slipped towards fresh eight-month lows against the yen in Asian trade Wednesday on worries over the huge US current account deficit and an expected narrowing of yield gaps, dealers said. The US currency dropped to 109.52 yen in Tokyo morning trade from 109.71 late on Tuesday in New York, approaching Friday's trough of 109.31, which was the lowest since September 12, 2005. The euro was steady at 1.2858 dollars after 1.2859 and dipped to 140.82 yen from 141.13. "Dollar sentiment is still weak as the US current account deficit is in focus as well as the issue of interest rate differentials," said Kikuko Takeda, currency research manager at the Bank of Tokyo-Mitsubishi UFJ. The dollar rose strongly against the euro and yen last year as a series of interest rate rises by the US Federal Reserve attracted capital inflows. Now, there is growing speculation that US interest rates have almost peaked while the eurozone and Japanese central banks are expected to raise official borrowing costs in the future, reducing the dollar's yield advantage. "I would say the dollar could decline to as low as 109.30 yen in the short-term but in the longer-term, sentiment towards the US unit will recover," said Takeda. The US currency has fallen heavily over the past month amid growing concern about global economic imbalances, the prospects of a pause in US interest rate hikes and signs of forex reserve diversification by world central banks. The dollar suffered anew in New York overnight after soft US economic data reinforced expectations that the Fed will soon stop raising lending rates. The Labour Department reported that higher energy costs pushed the US producer price index up a strong 0.9 percent in April but the core PPI reading, which excludes food and energy prices, came in below forecasts at 0.1 percent. The US central bank has made clear that the outlook for rates is now heavily dependent on incoming data after 16 consecutive hikes stretching back to June 2004 that have taken its headline rate to 5.0 percent now. Other figures showed that construction of new US homes fell for the third month running in April, lending weight to Fed chief Ben Bernanke's prediction that the economy will cool this year as the housing market slows. Dealers said the market is also awaiting the Bank of Japan's regular policy board meeting and governor Toshihiko Fukui's press conference Friday. BoJ's policymakers are meeting on Thursday and Friday and are widely expected to maintain the zero interest rate policy although a rise in borrowing costs is expected at some point in the coming months. The euro meanwhile largely shrugged off a disappointing business survey in Germany, the single currency zone's largest economy. The euro initially fell back below 1.28 dollars Tuesday after the ZEW institute said its main index on economic expectations fell by 12.7 points to a six-month low of 50 in May but it later recovered that symbolic threshold. Analysts had been predicting only a modest fall to 60 on the index. - AFP Published on the web by Business Report on May 17, 2006. © Business Report 2006. All rights reserved.