LONDON (AFX) - The major currencies remained rangebound in midday trade, but the dollar firmed against the yen after a disappointing Tankan survey in Japan and sterling remained in demand after stronger-than-expected PMI data. The dollar remains well supported, especially against the yen, with BNP Paribas currency strategist Ian Stannard confident it will go higher. "Looking at past experience, the BoJ has been extremely effective in weakening the yen," said Stannard. "In 1999/2000 it was very effective at defending the 100 level and pushing dollar/yen higher." The Bank of Japan's September Tankan survey of business sentiment provided further impetus to the dollar. The survey showed a rapid deterioration which is likely to worsen sharply in coming quarters. "The situation in Japan also shows that Japan is caught in a deflationary trap," said Stannard. "Having exhausted all its fiscal and most of its monetary tools, it is only left with depreciation." Michael Klawitter, a strategist at WestLB, agrees and said a, "weaker currency seems to be one of the few means left to the government to prevent deflation doing even more harm to the Japanese economy." Dollar/yen is also vulnerable on the upside even without further BoJ intervention, said Klawitter, from the fact that, "speculative accounts increased their long yen position close to this year's record high." Klawitter also thinks that the dollar is further supported from the expected 50-basis-point interest rate cut from the New York Federal Reserve tomorrow. Reserve should even strengthen the US currency as the market focus is once again on growth rather than interest rate differentials, he said. "In this environment, speculative accounts who already hold a large dollar short position will hardly increase their bet further, which also adds to the dollar's upwards bias," he said. The key focus for dollar bears, he added, is Friday's release of the September labour market report. The euro is gaining ground against the yen and is up against the dollar largely on a corrective bounce, which is not sustainable, said BNP Paribas' Stannard. The euro will come under pressure, he said, as risk appetite returns to the market-place following the unease generated by the terrorist attacks on Sept 11. "We are starting to see a bit of risk appetite return to the market, which is positive for the dollar as investors return to asset markets from their cash positions," he said. The International Monetary Fund's data last week also showed that the long-euro positions were at historic highs, said Stannard. Talk of a renewed appetite for M&A activity may affect the euro as well, he said, especially if it involves outflows from the euro zone. Though this isn't a major factor at the moment, "it should be closely looked at," he said. Weekend reports suggested that WestLB, the German bank, is considering a 25 bln stg bid for British Telecommunications PLC's entire fixed-line telephone net work later this autumn. Another suggested that Siemens AG, the German electronics giant, is considering a possible tie-up with Motorola Inc. Today's publication of the September's purchasing managers' index has not helped sentiment towards the euro either, dealers said. Euro zone manufacturing sector PMI fell to a seasonally adjusted 45.9 in September from 47.5 in August, according to market sources. The result is the worst performance for four years. Meanwhile, sterling continues to gallop along, largely from a domestic growth perspective, when compared with other major economies, said Stannard. The latest good news came from the UK Chartered Institute of Purchasing and Supply, whose PMI showed a better-than-expected rise to 46.5 in September from an unrevised 46.4 in the previous month. Longer-term though, Stannard remains sceptical about sterling's prospects, as the market's risk appetite picks up and the UK's trade position is assessed.