TOKYO (AFX-ASIA) - The dollar continued to firm against the yen in midafternoon trade following the smaller-than-expected rate cut in the U.S. and weaker-than-expected Japanese industrial output data, dealers said.
The U.S. Federal Reserve cut interest rates by 25 basis points overnight, against some expectations of a 50 basis point rate reduction.
"A 50 basis point rate cut could have weakened the value of the dollar against the yen," Tokyo Securities strategist Kazumasa Fukushima said.
According to data released by the Ministry of Economy, Trade and Industry, Japan's industrial output in May fell 1.2 pct month-on-month after a fall of 2.0 pct in April.
Private sector economists had forecast industrial output in May would come in at between a rise of 1.0 pct and a fall of 2.3 pct month-on-month, with the consensus at a fall of 0.4 pct.
"It seems that a combination of weak fundamentals and technical play will continue to push the dollar higher against the yen," Nikko Trust and Banking treasury department deputy general manager Yasuji Yamanaka said.
"The market has already begun to price in the likely deterioration of business sentiment in the next Tankan report, prior to the release on Monday, by selling the yen."
Local economists forecast the headline diffusion index (DI) for large manufacturers will come in at between minus 13 and minus 23 in the June report, compared with minus 5 in the March report.
"The dollar has already come to a delicate chart point and, if the unit can break the 124.80-125.00 yen level, where large option-linked sell orders are said to be lined up, it may create a new trading range of 122-127, or 123-128, up from the 120-125 yen range," Yamanaka said. However, participants turned reluctant to test key chart levels prior to the weekend summit meeting between U.S. President George W Bush and Prime Minister Junichiro Koizumi, dealers said.
Nikko's Yamanaka said that while there is some hope in the market that the U.S. may agree to allow the yen to weaken in return for stepped up structural reform in Japan, "such an agreement is most unlikely to be struck."
The dollar showed little reaction to the Bank of Japan's decision to maintain its present monetary policy directive, dealers said. They added that the euro was firm thanks to the growing view that the European Central Bank may cut rates at the next central council meeting.
"Given the confirmation of strong downside support for the euro against the dollar, the currency may move further closer to 110 yen shortly," Yamanaka said.