TOKYO (AFX-ASIA) - The dollar turned top-heavy against the yen in midafternoon trading due to a lack of follow-through buying following the sharp rebound earlier on hopes of additional rate cuts in the US, dealers said.
The dollar/yen trade showed little reaction to remarks by administrative vice minister at the finance ministry, Toshiro Muto, that the ministry will not comment on current dollar/yen levels but will take appropriate action if the currency fluctuates widely, they said.
"People feel that the monetary authority seeks a gradual weakening of the yen to the extent of not sparking claims among regional countries," Yasuda Trust and Banking Co Ltd foreign exchange assistant manager Takashi Fujieda said.
"The dollar/yen will probably be confined to a narrow trading range this week given the fact that there are too many events ahead, such as the summit meeting."
Dealers said investors will refrain from accumulating new positions in the dollar/yen ahead of tomorrow's press conference by Bank of Japan governor Masaru Hayami and semi-annual testimony by Federal Reserve board chairman Alan Greenspan.
The Fed chairman will deliver his semi-annual testimony to Congress on monetary policy and the economy on July 18.
Commerzbank head of foreign exchange Ryohei Muramatsu said the dollar is most likely to remain top-heavy against the yen, with the additional rate cut, if it happens, expected to spur active shift of fund allocations to the yen on narrower interest rate differentials. "Japan's real interest rate will become higher if the US rate is cut by another 25 basis point, which will unavoidably trigger capital inflows into high-yielding assets in Japan," he said.
Dealers said that the underlying concerns over the economic problems in Argentina will also weigh on the market, although the fears over the contagion effect receded to an extent.
"The bulk of capital which was re-allocated to such assets as Switzerland did not come back to the US, meaning that there is the underlying downside risk for the dollar," Yasuda's Fujieda said. The euro was held to tight trading ranges ahead of the Fed chairman's congressional testimony and the European Central Bank's policy board meeting this week, dealers said.
"If there is a rate cut at this week's meeting, the ECB may regain the market's trust to some extent, which will fuel some upward momentum," Muramatsu said.
But Yasuda's Fujieda said that any rate cuts in Europe are not likely to greatly revive sentiment towards the euro, adding that "unless the structural problems are all resolved, I can not be optimistic about this currency".
"Technically, unless the euro regains the 0.87 usd level, it can not gain any outright rising momentum."