Fukui buoys yen, dollar weakens before US election

LONDON, Nov 7 (Reuters) The yen gained versus major rivals on Tuesday after Bank of Japan Governor Toshihiko Fukui said the BOJ would raise interest rates pre-emptively, while the dollar fell on jitters before U.S. congressional elections.

In the mid-term polls, the Democrats may take control of the House of Representatives from President George W. Bush's Republican Party but the outcome in the Senate is seen as finely balanced.

Analysts say Democrat control in the lower house could be negative for the dollar as it may lead to a rise in protectionist policies or to political deadlock which could slow reforms and economic growth, although most reckon any currency reaction would be limited.

In the euro zone there were some signs that interest rate increases could continue into 2007, with International Monetary Fund chief Rodrigo Rato saying euro area policy needed to become more neutral and European Central Bank Governing Council member Axel Weber voicing alarm on Monday about the inflation outlook.

''That speaks in favour of more rate hikes in Europe than the market is currently pricing and that has probably helped the euro a bit,'' said Johan Javeus, FX strategist at SEB Merchant Banking in Stockholm. ''You could (also) explain part of the dollar weakness with the pure uncertainty that always surrounds an election, especially this one which seems to be tied in some of the Senate seats.'' By 0819 GMT the dollar was down 0.29 percent at $1.2753 per euro, inching towards last week's one-month low of $1.2798. The dollar fell 0.4 percent to 117.72 yen from Monday's one-week high of 118.45 yen. The euro eased 0.1 percent to 150.18 yen, but was still quite close to record highs.

BOJ Governor Fukui's comments on raising rates pre-emptively to avoid sharp economic swings, coming after he had said he would not rule out an increase before the year-end, helped to stoke expectations of a near-term move. That prompted traders to trim their bets against the Japanese currency.

''Fukui seems to be signalling a bias to hike sooner rather than later,'' said Sharada Selvanathan, a currency strategist at BNP Paribas in Singapore.

Most market players believe the BOJ will next lift rates to 0.5 percent in January-March 2007.

ELECTION JITTERS The dollar had jumped against major currencies late last week after solid payrolls data bolstered expectations that U.S.

rates would be on hold for a while.

Federal Reserve officials on Monday also warned that they are more inclined to lift rates again than cut them from 5.25 percent. But their comments failed to lead to a dollar rally, as investors took profits before the mid-term elections.

All seats in the U.S. House of Representatives and 33 of the 100 U.S. Senate seats are at stake, along with 36 state governorships.

''The outlook remains one that will likely see the Democrats win control of the House of Representatives and the subsequent risk of political gridlock could hamper prospects for the U.S.

economy in general over the next couple of years,'' David Jones, chief market analyst at CMC Markets, said in a note to clients.

The dollar was also dented after San Francisco Fed President Janet Yellen had said late on Monday that some countries with excess savings may invest fewer funds in U.S. assets.

REUTERS SBA DS1615