Array

TOKYO, Sep 5 (Reuters) The yen rose to a two-week high against the dollar on Tuesday on a wave of short-covering triggered by strong economic data ahead of a Bank of Japan policy meeting later in the week.

Dealers have been unwinding a raft of short positions after data showing a rise in Japanese capital spending on Monday rekindled speculation that the central bank might raise rates this year despite a run of soft economic data last month.

Traders said the possibility of a continuing yen rebound on such repositioning was running high given that net short positions in the currency jumped to a record peak last week, helping to push it to a record low against the euro and a six-week trough versus the dollar ''The spending data was strong ... so the market is testing the upper and lower limits of recent ranges,'' said Nobuo Ibaraki, forex manager at Nomura Securities, referring to the 114-118-yen range the dollar/yen has traded in for much of the summer.

While position adjustments were adding to the market's momentum, he added that the primary driver of yen gains was data on Monday that showed a 16.6 percent rise in capital spending in April-June from last year.

The yen could gain more in the near term if the market becomes more confident that the economy is recovering, Ibaraki said, adding that a rise to 114 yen this week was not out of the question.

Still, some traders said the yen's reprieve could be limited, given that Japanese rates will continue to trail those of its rivals, a factor that has driven the currency's woes in recent months.

The market's main focus is on a news conference by BOJ Governor Toshihiko Fukui on Friday. Fukui will speak after a two-day policy meeting, at which the central bank is widely expected to keep rates unchanged at 0.25 percent.

The dollar traded around 115.85 yen, down around 0.12 percent for the day so far after hitting a two-week low around 115.75 yen. The U.S. currency tumbled more than 1 percent on Monday.

Some dealers said gains may be capped at around 115 yen per dollar, where Japanese importers were waiting to buy the U.S.

currency.

The euro traded nearly half a percent lower at 148.65 yen after falling to around 148.60 yen and pulling further away from a record high of 150.73 yen hit last week, according to electronic trading platform EBS.

This helped to drag other currencies, such as sterling Swiss franc and the Australian and Canadian dollars, lower versus the yen.

The high-yielding New Zealand dollar slumped nearly 1 percent against the yen to around 74.70 yen pulling further away from a six-month high just above 77 yen hit last week.

The New Zealand currency was the day's worst performer, also extending losses against the U.S. and Australian dollars.

The single currency was down 0.3 percent against the dollar at $1.2835 FOCUS ON FUKUI Traders are waiting to hear what Fukui will say about the economy, given that a smaller-than-expected rise in consumer prices and weak industrial production data had dampened expectations of another rate rise this year.

Anticipation is running particularly high after Monday's spending data suggested that a rate rise before December may still be on the cards after all.

''The market had been betting on the possibility that the BOJ wouldn't raise rates this year, but that view is starting to change,'' said Takehiko Jimbo, forex manager at Mitsubishi UFJ Trust and Banking.

He said the yen's direction could remain murky until the market has a clearer view of whether the BOJ would raise rates by December.

For now, however, traders said that the market was tilted in favour of the yen, in anticipation that Fukui on Friday could issue a hawkish statement on the economy and rates.

But even if the central bank squeezes in a rate rise by the end of the year, Japanese rates will remain paltry compared with those of rival currencies.

The BOJ raised rates to 0.25 percent in July in its first rate rise in six years, but many in the market say that it will take a while for domestic rates to catch up with 5.25 percent rates in the United States and 3.0 percent in the euro zone.

REUTERS CS DB1219