By Sumeet Desai LONDON, June 19 - The dollar retreated from one-month highs against the yen on Tuesday after Bank of Japan Governor Masaru Hayami warned currency intervention might be needed if exchange rates moved too rapidly. Hayami also said Japan should not drive the yen lower due to the impact on neighbouring countries and his comments succeeded in driving the dollar down about 1/3 yen.
Still, analysts said the yen was likely to stay under pressure in the coming days because of persistent worries over the health of the Japanese economy which had undermined it earlier in the day. "The Hayami comments show Japan doesn't want to see the yen rapidly weaker. That's because of concern about the destabilising effect it would have on the economy," said Derk Halpenny, currency economist at Bank of Tokyo Mitsubishi. "But until we get a clear presentation of policy the market is going to be sceptical of Japan," he added. Hayami's warning on intervention also sent the euro down against the yen to the day's lows below 106 yen, pushing it even further down against the dollar.
At 0710 GMT, the dollar was trading around 123.40 yen and $0.8580 per euro . Euro/yen was at 105.88 yen . Earlier, the dollar crept up as high as 123.80 yen, having ridden over Monday's high of 123.52 yen and was about a half yen higher than 123.26 yen in late New York trade. Dealers said the yen suffered as the market fretted over the pain the Japanese economy would have to go through to tackle structural reforms. Rumours of a corporate failure at a Japanese retailer or construction company also helped the dollar climb against the yen.
Traders said shares of Japan's fourth-largest supermarket Mycal Corp were coming under pressure on market concerns about its financial health. A company spokeswoman said the talk was groundless. "The yen had been bought from April to May on the euphoria based on the idea that the economy will improve if Prime Minister (Junichiro) Koizumi carries out structural reforms," said Naoto Ohnuma, foreign exchange manager at Mitsubishi Corp in Tokyo. "But the market is now turning to the reality. If Koizumi does implement reforms, there will be more bankruptcies, and unemployment will be a lot higher," Ohnuma said.
EUROZONE DATA AWAITED
Traders were waiting for release of euro zone industrial production figures at 1000 GMT. Average forecasts are for output to fall a further 0.6 percent on the month after a 0.2 percent drop in March. Traders said the single currency continued to suffer from evidence of slowing growth and rising inflation. "There's not much demand to buy euros out there," said Halpenny. Traders said the market was probing key support for the euro at $0.8550.70.
There was still a lingering concern about possible ECB intervention, particularly after Sweden's central bank acted aggressively to support its currency. The Riksbank intervened for a second straight trading session on Monday lifting the krona to three-week highs by selling both dollars and euros.