Yen perks up in advance of BOJ, dollar stabilises

LONDON, Dec 18 (Reuters) The yen gained ground against the dollar and euro on Monday as investors awaited the Bank of Japan's interest rate decision this week and clues on the 2007 monetary policy outlook.

The dollar scaled back from Friday's rally, while the euro found support after European Central Bank President Jean-Claude Trichet said the ECB would do what was needed for price stability and that euro zone rates remained accommodative.

The BOJ is set to leave rates on hold at 0.25 percent on Tuesday, after a series of weak data slashed expectations for a hike. Investors are awaiting the post-decision news conference by BOJ Governor Toshihiko Fukui to see if he flags the possibility of a January rise.

''The markets will focus really on the rhetoric from Fukui to see whether he is likely to move in January, which will support the yen. We think there will be a hike in January,'' said Steven Saywell, chief currency strategist at Citigroup.

''Trichet certainly doesn't want to encourage inflationary wage increases at this time of the year. It's more of a warning rather than a signal.'' By 1055 GMT, the dollar was down 0.3 percent on the day at 117.77 yen, after hitting a one-month high of 118.32 on Friday as investors squared positions in advance of Christmas holidays next week.

The euro was also down 0.3 percent at 154.14 yen, retreating from last week's record high around 155.60.

The euro was up slightly against the dollar at $1.3092, within half a cent of a three-week low set on Friday.

''We are now in the illiquid holiday trading period,'' said Derek Halpenny, currency economist at BTM-UFJ.

''The FX rates become detached from the economic fundamentals, and those still at their desks can push rates one way or another.'' The euro ticked down after the European Commission's quarterly report said the weakening dollar, along with a German value added tax hike and easing global demand would weigh on 2007 euro zone growth. The report also said euro zone interest rates were relatively low.

Other figures released on Monday showed the euro zone October trade surplus increased to 2.4 billion euros, from 2.1 billion in September and against a forecast of 1.7 billion.

Trichet told a Greek daily newspaper that euro zone rates remained accommodative.

JAPAN HIKE The low-yielding yen has been easy prey for investors to sell and use the funds to buy higher-yielding currencies, pushing sterling to an eight-year high against it in recent days.

Investors are now looking for a Japanese rate rise in January after the BOJ's quarterly tankan survey showed sentiment at big manufacturers edging up to a two-year high in December and the economy's recovery spread to smaller manufacturers and businesses.

After the tankan, a Reuters survey of 45 Japanese bond market players showed that 33 expect a January rate hike.

For the euro zone, investors expect the ECB to raise rates at least once next year from the current 3.5 percent.

Investors were focused on U.S. current account data for the third quarter due at 1330 GMT, with market participants expecting the deficit to rise to $225.0 billion from $218.4 billion in the previous quarter.

Market players will also scour figures from the U.S. National Association of Home Builders to see if a shake-out in the housing market is starting to stabilise.

The NAHB index for December is expected to edge up to 34 from 33 in November, which would mark a third straight month of improvement, from the 15-year low of 30 hit in September.

REUTERS PV VV1700