New York, Feb. 24 (Bloomberg) -- The yen surged against the dollar and the euro as the nomination of Toshihiko Fukui to head the Bank of Japan quelled speculation that the central bank would flood the economy with yen in a bid to bolster growth. Fukui, who would replace Masaru Hayami, has indicated he doesn't support setting an inflation target to end half a decade of falling prices. Some traders bought back yen they had sold in recent weeks as a bet Prime Minister Junichiro Koizumi would nominate an economist who would set an inflation target and boost the supply of yen. With Fukui, ``you probably won't have an aggressive monetary policy easing which would lead to a weaker yen,'' said Francesca Fornasari, a currency economist at Lehman Brothers Inc., one of the 25 biggest traders in the $1.2-trillion-a-day currency market.
The yen gained to 117.68 per dollar at 9:40 a.m. in New York, its strongest level since Jan. 27, from 118.70 on Friday. The yen also strengthened to 126.58 per euro from 127.84 on Friday. Fukui's appointment is causing ``a sigh of relief'' and leading investors to buy back yen, said David Mozina, head of foreign exchange strategy for the currencies of the 10 largest industrialized nations at Bank of America Corp. Mozina said the yen could strengthen to 117 this week. Koizumi also recommended former vice finance minister Toshiro Muto and Kazumasa Iwata, a Cabinet official, to be the central bank's new deputy governors, Ohno said.
Euro
The euro also declined against the dollar after the head of the European Central Bank said the region's economy probably won't recover this year, signaling policy makers may cut interest rates. ECB President Wim Duisenberg said at a meeting of Group of Seven finance ministers and central bankers on Saturday that ``the perspective of an economic recovery this year is no longer supported by the most up-to-date information.'' The dollar has lost almost 7 percent versus the euro in the past three months on expectations the U.S. will lead an attack on Iraq. ``The risks do not justify investment'' in the euro, said Peter Lucas, who helps manage $1.7 billion at Ashburton Ltd. in Jersey, the Channel Islands. He holds none of the common currency right now. ``We've been looking to get into the British pound,'' he said, adding that he's ``very positive'' on the Canadian dollar in coming months. The rate on the euribor April interest-rate futures contract plunged 10 basis points to 2.47 percent, 22 basis points below the current three-month lending rate. Lower interest rates would pare returns on euro-denominated assets. The ECB's key rate is 2.75 percent.
Iraq
A week ago, Duisenberg said the ECB probably would lower its growth forecast for the year. The International Monetary Fund pared its growth forecast for the euro region to 1.3 percent from 2.3 percent, according to an Italian Treasury official who asked not to be named. The dollar's rise against the euro may be limited by concern the U.S. will attack Iraq without full United Nations support, after a French government spokesman said France would not vote for a new U.S.- and U.K.-backed UN resolution condemning Iraq for failing to disarm.
France, China and Russia, who with the U.S. and U.K. are permanent members of the UN Security Council and can veto any resolution, oppose military action. The U.S. currency has fallen more than 7 percent against the euro since UN weapons inspections in Iraq began in November, pushed down by concern a war will increase its budget deficit and cut demand for U.S. stocks and corporate debt. //www.quote.bloomberg.com