By Isabel Reynolds TOKYO, June 18 - The dollar held onto its gains against the yen on Monday, partly thanks to a gloomy assessment of the economy in the Bank of Japan's (BOJ) monthly report.
The central bank downgraded its overall economic assessment, saying adjustment was intensifying due to a big fall in output and added the adjustment was likely to continue in the near term.
But market players said the dollar's rise was likely to be limited as the report contained few surprises after gross domestic product (GDP) released a week earlier showed a contraction in the first quarter of this year. Most had expected a shrinkage in the second quarter at the earliest.
"The yen has already fallen on last week's weak GDP and it is difficult for it to move again on the same factor," said a dealer at a Japanese bank.
The dollar was trading around 123.15 yen in late Asian trade, compared with a peak of 123.25 hit in New York on Friday. "The Japanese economic outlook is deteriorating, making it more likely that the Bank of Japan (BOJ) will ease monetary policy further," said Taisuke Tanaka, strategist at Credit Suisse First Boston.
After the BOJ report, analysts said it was only be a matter of time before the bank takes more drastic easing steps, possibly increasing its provision of funds in the market from five trillion yen currently.
Last Friday, the BOJ kept its ultra-easy policy unchanged, defying intense political pressure to loosen credit further.
The dollar is likely to keep an upper hand on the yen for now because any increase in the supply of yen funds is likely to weigh on its value, they added.
But on Monday morning, the dollar's rise was limited because speculators and Japanese exporters took the opportunity to sell the dollar near its highest levels in a month.
EURO GAINS STRENGTH
"Exporters were placing offers around 123 yen," said Fuji Bank's Tsukamoto, explaining why the dollar failed to touch its four-week high of 123.25 yen.
The dollar soared more than two yen in New York, which some linked to the reallocation of assets out of Japan ahead of changes to the FTSE's global market index on Monday.
"That came just after the BOJ's announcement that it would not alter monetary policy, which was seen positive for the yen, so it caught the market looking the other way," said a dealer at a Japanese bank.
The euro was fairly firm on the dollar at 86.42 cents , against 86.11 cents at the end of last week. Against the yen, the single currency ticked up to 106.31 yen compared with 105.83 yen in late New York.
Dealers said the euro was supported by speculation in some quarters that the European Central Bank (ECB) might intervene to prop up the currency after Sweden's central bank, the Riksbank, bought the Swedish crown against the dollar and the euro, dealers said.
But many market players were unsure of the ECB's intention or prospects of success.
Sterling continued strong against the yen , standing at around 172.84 yen in late afternoon, compared with a low of around 167.00 last week. Some analysts cited the effect of the FTSE's weighting change as the reason for this move, although others said this was unlikely as the changes were well flagged.