LONDON, Feb 24 - The yen retained most of its early gains on Monday after Japan named Toshihiko Fukui, a policy conservative and an opponent of radical monetary easing to tackle deflation, to head the country's central bank. Fukui, replacing Masaru Hayami whose term ends on March 19, is considered reluctant to take unorthodox policies -- such as targeting inflation, buying shares, real estate and foreign bonds until deflation ends -- to boost prices and print more yen to cheapen the currency. The long-awaited but widely-expected appointment of Fukui was seen positive for the yen if anything. But the currency came off its highs as the nominees for the two posts of deputy governor -- Kazumasa Iwata of the Cabinet Office and former Vice Finance Minister Toshiro Muto -- appeared to be advocates of more radical policies.
"Fukui will ease policy going forward, for example by increasing target volume for current account deposits or boosting JGB purchases," said Steven Saywell, senior currency strategist at Citibank. "But he will fall short of going into full-blown inflation targeting. Deputy governors have limited power so there will be no strong shift in policy. Japan is relieving the symptoms rather than the cause and yen strength is unwarranted." By 0855 GMT the yen stood at 118.62 to the dollar, up a third of a percent from late New York levels on Friday and around half a yen away from its three-week high set last week.
Against the euro the yen stood at 127.37 having risen earlier to 126.89. The dollar held tight ranges against the euro at $1.0756.
RATE FACTOR
The euro lost ground in Asia, in part due to a suggestion by European Central Bank (ECB) President Wim Duisenberg at the weekend that the bank may ease its monetary policy. Speaking on the sidelines of a Group of Seven meeting in Paris on Saturday, Duisenberg said the bank's hoped-for economic recovery later this year was no longer certain.
He also said the central bank's hands would not be tied by a possible Iraq war, which was interpreted as a clear signal that the ECB could cut interest rates in the near term. The ECB's key rate is currently 2.75 percent and will next be reviewed at the bank's policy meeting on March 6. Because higher interest rates in the euro zone have been one of the main attractions of the euro, a rate cut could damage the euro's outlook.
But some dealers questioned whether interest rates would matter when many investors are buying the euro -- along with gold and other safe-haven assets -- out of fear of war, rather than because of economic fundamentals. "The euro's firmness in recent months had little to do with economic fundamentals. Few investors are buying the euro because they want to invest in the euro zone," said Kota Kimura, assistant forex manager at Shinkin Central Bank in Tokyo.
BLAND G7, MORE WAR TALK
Besides the comments from Duisenberg, the G7 meeting generally produced little by way of surprising remarks about currency movements. In its communique, the group gave its standard line on currency rates, saying: "We will continue to monitor exchange markets closely and cooperate as necessary." Attention has shifted back to the debate over if, when and how the United States would lead a war against Iraq.
On Saturday, U.S. President George W. Bush said the United Nations had a last chance to prove its relevance by adopting a resolution the United States will propose that could pave the way for war on Iraq. A spokesman for British Prime Minister Tony Blair said the U.S. and Britain will present a new resolution on Iraq to the U.N. Security Council this week but wait a few weeks before calling a vote to give Iraq a last chance to comply. "It seems like a decision on Iraq is unlikely for a week or two. I think it is still difficult for the forex market to find a clear direction given uncertainty surrounding Iraq," said Ken Fujii, forex manager at Mitsubishi Trust and Banking Corp in Tokyo. //www.forbes.com