Array

Tokyo, Mar 8: The dollar slipped against the yen on Wednesday (Mar 8, 2006) as investors booked profits before the end of a Bank of Japan policy meeting the next day at which the central bank could ditch its ultra-loose monetary policy.

The dollar had rallied over the past two days as Federal Reserve officials signalled the central bank will keep lifting U.S. short-term rates to prevent inflation from flaring up, helping the U.S. currency recover from one-month lows.

But all eyes are on the BOJ, especially since investors are divided about whether the central bank will scrap its five-year-old quantitative easing policy at the two-day meeting and, if so, what kind of policy target would follow.

Data last week gave the clearest evidence yet that Japan is escaping nearly a decade of deflation, stirring speculation the BOJ could end the unprecedented policy of force-feeding banks with cash as soon as Thursday.

Just a day after the BOJ meeting, the U.S. payrolls report for February will be released and forecasts are for a healthy 210,000 increase in non-farm jobs, helping bolster the heightened expectations for more Fed credit tightening.

With those events on the horizon, market players have started to square their books and head to the sidelines.

''People are taking a little bit of risk off,'' said Luke Waddington, head of forex trading at Royal Bank of Scotland in Tokyo. ''It's difficult to make a call over the next two to three days where the market is going to go.'' He added that the confusion about whether the BOJ will make a shift on Thursday and its significance means the yen could be ''all over the place''.

After any shift, the BOJ is expected to hold overnight rates near zero for a while even as it decreases the 30-35 trillion yen target ($297-$255 billion) for current account balances that banks are required to hold at the central bank.

Investors see the BOJ raising rates to 0.25 percent or 0.5 percent by year-end but don't expect much more than that for now, keeping the yen among the lowest-yielding currencies in the world. The BOJ has held rates below 0.5 percent since 1995.

The dollar slipped 0.3 percent from late New York levels to around 117.45 yen by 0340 GMT, still well above a one-month low of 115.45 yen hit last week.

The euro dipped 0.25 percent to 139.75 yen.

In another positive sign for Japan's economy, data showed outstanding bank loans rose 0.2 percent in February from a year earlier, suggesting a five-year decline in lending is ending.

When quantitative easing was first launched in March 2001, one goal for the policy was to help stem a banking crisis.

The single currency was up slightly at $1.1905, having tumbled from a one-month high of $1.2093 struck on Monday. The single currency was still stuck in a rough range between $1.17 and $1.23.

CONTRASTING CENTRAL BANKS

Markets now see the Fed lifting rates to 5 percent or 5.25 percent from the current 4.5 percent. The shift in expectations helped drive 10-year U.S. Treasury yields to 21-month highs.

''The dollar is repricing as U.S. rate markets ratchet up expectations for fed funds,'' said Richard Yetsenga, Asian currency strategist at HSBC in Hong Kong. ''So the dollar should do well, especially against currencies that have relied on yield.'' The New Zealand dollar matched an 18-month low of $0.6471 and is down more than 5 percent this year as markets see the country's central bank responding to an economic slowdown by cutting rates later in the year.

The Reserve Bank of New Zealand will release a statement after a policy meeting on Thursday and is expected to keep rates at 7.25 percent, the highest in the developed world, and maintain a hawkish bias for now.

The Australian dollar hit a two-month low against the U.S.

dollar after the Reserve Bank of Australia kept rates unchanged at 5.5 percent, as widely expected, the 12th straight month of steady rates. The Aussie dipped as low as $0.7318.

REUTERS