By Chikafumi Hodo
TOKYO, Oct 24 - The dollar retained its recent uptrend in Tokyo on Wednesday as the market regained some confidence in the U.S. economy, but lingering fears over anthrax kept investors cautious about chasing it on rallies.
Sentiment for the dollar was undermined after a White House spokesman said anthrax culture had been found at a remote military facility where all mail for the White House is screened.
The news chased away aggressive dollar bulls after the greenback hit a fresh two-month high of 123.05 yen in offshore trade on Tuesday, traders said.
Although the dollar was well-supported around 122.50 yen in Tokyo, many traders were waried about building up fresh long positions after seeing the fall.
"Having seen the dollar recovering back to pre-attack levels and watching many short holders getting squeezed, it's clear that the dollar is becoming increasingly supported," said Hideaki Furumaya, head of the interbank desk at Mizuho Trust & Banking.
"But I'm not getting an impression that the market wants to build fresh longs aggressively, with caution over anthrax still very strong," Furumaya said. At 0251 GMT, the dollar was quoted at 122.58/60 yen compared with Tuesday's late U.S. level of 122.51/59.
The dollar only moved in a tight range of 122.47 to 122.65 yen in the morning.
Traders noted heavy profit-taking orders above 122.80 yen, while stop-loss sell orders were thought to be lined up between 122.00 to 122.20 yen.
The euro held near U.S. level of $0.8905/10 , having dipped to a low of around $0.8870 in offshore trade.
Amid concerns about the state of the euro-zone economy, all eyes are on the European Cental Bank's policy-setting meeting on Thursday. Dealers said the euro was expected to come under pressure again if the ECB refrained from cutting interest rates.
The euro stood at 109.08/29 yen compared with Tuesday's 109.18.
MSCI REVIEW, FORD'S BONDS
Dealers said a mix of aggressive interest rate cuts and heavy fiscal stimulus had renewed some confidence in the U.S. economy, lifting U.S. share prices and the dollar despite the likelihood the September 11 attacks pushed the economy into recession.
Some dealers said, however, it was premature to be optimistic about the outlook for the U.S. economy, with most economic indicators still giving bearish economic signals.
Explaining the dollar's rapid broad-based recovery, dealers said some investors were shifting their portfolios into the dollar from the euro and the yen.
Rumours that Morgan Stanley Capital International would review its bond weightings in late November to increase the weightings for U.S. paper and cut the weightings of Japanese and euro-based bonds induced speculative dollar buying, dealers said. MSCI's global bond indices are widely used as a yardstick for the investment performance of global fund managers.
Japanese bank and institutional investor appetite for foreign bonds was also supporting the dollar, dealers said.
Although most investors fully hedge most of their foreign bond purchases through forward currency contracts, which is limiting impact in the spot market, rumours that Japanese investors were flocking into the latest bond issue by Ford Motor Co drew some speculative dollar buying.
On Monday, Ford and its finance arm sold a total of $9.4 billion of bonds, more than triple the amount initially planned.
Combined with Ford's sale, more than $13 billion of investment grade U.S. corporate debt was sold on Monday.
The Ford payment date is set for Thursday.
"Some Japanese investors were rumoured to have placed bids for them but I don't think they are brave enough to buy them in huge volume," a forex manager at a Japanese bank said.
"Ford is a widely know name, and Japanese like those names. But many investors are taking a very sensitive attitude in taking credit risks right now," the manager said.
Standard & Poor's last week cut Ford's long-term rating to "BBB-plus" while Moody's Investors Service downgraded to A3.