20 December 2001, 09:34  Forex - Dollar firms in midmorning Tokyo, capped by profit-taking

TOKYO (AFX-ASIA) - The dollar was firmer against the yen in midmorning, again seeing upside in Asian trade after profit-taking overseas and a persistent failure to break through resistance at the upper 128-yen levels, dealers said. Market players continue to expect the yen to weaken in the new year but the recent sharp fall has left some short-term players with over-extended dollar positions towards the holiday period, they added. The Bank of Japan's slightly earlier than expected decision to ease rates further had little impact on the market as the move is seen as a largely token move to satisfy the bank's critics. Further turmoil in Argentina, including the imposition of a state of emergency and expectations of outright default, had little impact on the major currencies as the trouble has been brewing for a long time, dealers said. Emerging-market bond trading has also been calm. Chase Manhattan Tokyo branch foreign exchange analyst Minori Takeuchi said the dollar continued to try the upside in Asian trading but seems to have found a near-term ceiling ahead of the year-end. "Everyone thinks the dollar will go to 130 yen so maybe (exporters) are refraining from selling. But foreigners are still active in Tokyo. We saw a lot of profit-taking but also we saw buying," Takeuchi said. "From the technical point of view, it may be at an important point," she said, noting that a break below 127.10 or above 128.80 yen would be significant for future direction. While the majority of the market continues to look for the yen to weaken in the new year, the consensus on further dollar strength leaves the US unit vulnerable to negative surprises, Takeuchi noted. "Everyone has been focusing on the bad news in Japan and became optimistic about the US," she said. However, sales figures in the US show it is having the worst Christmas on record, while the chances of a fiscal package being pushed through before the holiday period are falling away. "If it goes below 127.10 yen it could go lower to 124.30," Takeuchi added. The impact from yesterday's early BoJ easing was a very short-lived affair. "It came a little bit sooner than expected," Takeuchi said, but added that it is mainly an extension of existing policy, while the expansion of the use of commercial paper is related only to repo operations, not outright purchases. Some critics have said the central bank should buy CP or bonds directly from corporations to sidestep the liquidity trap operating in the financial sector that is preventing additional funds reaching companies. However, the expansion of the balance of current accounts held at the bank to a targeted 10-15 trln yen, announced yesterday, does nothing to change this. The balance, previously targeted at "over 6 trln yen" and recently seen at 8-9 trln, would have risen, anyway, at the year-end for cyclical reasons. "The bank doesn't expect it to effect the real economy. All they can hope to achieve is at the level of market sentiment," Takeuchi said. "Next year we could see more corporate failures and the BoJ will be under pressure again and they may do more," she added. Takeuchi said the worsening situation in Argentina is no surprise to anyone who reads the news. "It's no secret that the country is in a terrible situation and that they will have to default or something similar," she said. "I think it has not affected the major currencies. Emerging bond markets have been moving calmly."

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