The yen held firm in early trade after the Japanese stock market fell to a new 19-year-low on renewed deflationary concerns, dealers said. The Nikkei 225 index closed down around 170 points at 8,540 on worries that aggressive bank restructuring could undermine asset markets and cause huge bankruptcies and unemployment.
BNP Paribas global head of forex strategy Hans Redeker said the stock market decline is likely to force the government to take measures to stabilise these markets. "Top priority must now be to stabilise Japanese asset markets as a further decline potentially derails the entire (State Minister for Economic and Fiscal Policy) Heizo Takenaka reform project," he said.
"Accordingly, we suggest yen downside potential will be limited," he said. "The General Motors economist has already complained about yen weakness, suggesting that a weak yen would not cure the Japanese problem." Meanwhile, euro/dollar remains little changed on the week, though Commerzbank currency strategist Kamal Sharma noted that US President George Bush's announcement to use the courts to end the West Coast port strikes could provide some support for the dollar.
"With the market expecting no change in ECB rates tomorrow, euro/dollar is expected to trade in a 0.9750-0.9880 range ahead of the US retail sales and University of Michigan consumer confidence reports on Friday," he said. German industrial production data later this morning may provide some interest. The August result is expected to be 0.5% on a month-on-month basis for a 4% year-on-year decline. Though they will not be sufficient to prompt the ECB to cut rates tomorrow, Commerzbank's Sharma said the cumulative impact of negative data releases and the impact on confidence of stock market volatility will eventually lead the ECB to cut rates by the year end.
Sterling remained rangebound ahead of the latest monthly UK trade figures and the start of the latest two-day Bank of England Monetary Policy Committee meeting. Like the ECB, no change is expected when the outcome is revealed tomorrow.//www.ananova.com