By Mariko Hayashibara
TOKYO, Aug 27 - The dollar edged higher against major currencies on Monday morning following an offshore recovery on a rally in U.S. equities and positive U.S. housing data on Friday. But with London financial markets closed on Monday for a holiday and the outlook for the major currencies still unclear ahead of the European Central Bank's (ECB) rate-setting meeting on Thursday, dealers were hesitant to take new positions.
"The key this week will be the movement of the euro against the yen after whatever decision the ECB makes," said a dealer at a major Japanese city bank. "If the euro moves down against the yen, that could cause the dollar to fall to the 115-118 yen level," he said, adding that such a scenario was likely if the ECB refrained from cutting interest rates.
In early morning trade, the dollar rose to a high of 120.50 yen from 120.01 in late trading in New York on Friday and the 119.80/90 level in late Tokyo trade the same day. Dealers tried to test the dollar's upper end after dollar-supportive comments on Monday morning from Japan's top financial diplomat Haruhiko Kuroda.
But the attempt failed in the face of stiff offers including those from Japanese exporters seen around 120.70/80 yen, which disappointed speculators, pushing down the dollar to 120.20/25 yen by noon. Kuroda, the vice finance minister for international affairs, repeated his warning that the yen's recent level was not appropriate and there was no reason for the Japanese currency to strengthen given current economic fundamentals.
The euro was at 109.54/64 yen , little changed from Friday's level in late New York trade. The dollar also regained ground against the euro, standing at $0.9110/15 , up 0.40 percent from Friday's late New York level, having reached a high of $0.9151 in offshore trade the same day. The U.S. currency also recovered against the Swiss Franc, standing at 1.6684/94 franc , up 0.25 percent. U.S. stocks on Friday posted their biggest rally in more than six weeks after Cisco Systems Inc. said business was stabilising, and strong sales of new homes boosted optimism that consumers are propping up a key sector of the U.S. economy.
WILL ECB TAKE ACTION?
Despite the dollar's broad-based recovery in early Tokyo trade, most dealers remained doubtful about its outlook and are waiting for the ECB meeting for fresh clues, dealers said. Many participants saw a possibility that the euro could consolidate lower after a six-week run-up of nearly 10 percent against the dollar, but expectations of a growth-boosting European rate cut have also supported the single currency. The ECB, wary of relatively high European inflation, has only cut rates once this year.
A survey showed that 41 out of 55 economists predicted the ECB would cut interest rates by a quarter point to 4.25 percent on Thursday.
Expectations the ECB will cut rates were first stoked by news that both German producer and import price inflation fell much more than expected in July. France's inflation rate also fell 0.2 percent month-on-month in July.
But European money supply data, also scheduled for release this week, may dent those hopes if they show a strong rise.