Yen hits record low against euro as stocks rise

TOKYO, May 21 (Reuters) The yen hit a record low against the euro on Monday, with sellers of the low-yielding currency encouraged by regional stock markets' calm reaction to China's surprise move to widen the yuan's trading band and raise interest rates.

Group of Eight finance ministers avoided discussing the yen's weakness at a weekend meeting, which market players also took as a green light to push up high-yielding currencies.

The ministers issued a communique that was upbeat on the global economy and made no mention of currencies. The ministers also said there was no discussion of foreign exchange rates.

''The G8 was not a major concern for the market to start with, because the currency issue was not expected to top the agenda at the summit meeting next month,'' said Masafumi Yamamoto, currency strategist at Nikko Citigroup in Tokyo, referring to June's meeting of G8 heads of state in Germany.

''The yen looks to continue to be weak after it failed to rally on China's move, and strong demand from Japanese investors for foreign assets was seen,'' Yamamoto added.

The euro was up 0.15 percent against the yen at 163.85 yen after hitting a record high of 163.94 yen earlier in the session.

The dollar traded at 121.25 yen up 0.1 percent from late on Friday in New York and near a 3-month high of 121.39 yen.

The yen initially jumped against the dollar and the euro on Friday after China said it would allow the yuan to rise or fall by 0.5 percent against the dollar each day, broader than the current 0.3 percent band. China also raised its one-year lending rate by 0.18 percentage point and the one-year deposit rate by 0.27 percentage point.

Asian equity markets were not rattled by China's moves, with stocks in Tokyo and Hong Kong rising and China's main stock index recovering from an initial 3 percent tumble.

''After a scare on the plunge in Shanghai share prices earlier in the day, players in the foreign exchange market are feeling at ease thanks to the solid performance in stock markets,'' said Tsutomu Soma, a senior manager at Okasan Securities.

Investors are likely to stick to risky positions such as carry trades in which low-yielding currency is borrowed to fund investment in high-yielding currencies and assets, as long as global stock markets take surprise moves like China's in their stride, traders said.

The euro was little changed against the dollar at $1.3515 short of a record high just above $1.3680 hit last month.

U.S-CHINA TALK IN FOCUS The dollar drifted sideways after investors pared back their expectations that the Federal Reserve will cut interest rates this year on a series of unexpectedly robust U.S. economic reports.

Data on Friday showing U.S. consumers unexpectedly grew more optimistic on the economy in May followed stronger-than-forecast data last week on housing starts, the manufacturing sector and jobless claims.

Analysts said caution over the outcome of a meeting between U.S.

Treasury Secretary Henry Paulson and China Vice Minister Wu Yi on May 22-23 in Washington may put pressure on the dollar, though few surprises are expected.

''China looks as if it has reacted to this meeting already by widening the yuan's trading band to please the United States.

There may be no more surprises at this event,'' said a trader at a Japanese trust bank.

The two sides will discuss sticking points in trade relations, including the value of the yuan, as part of a ''strategic economic dialogue'' set up last year.

REUTERS SBA ND1308