LONDON - The dollar held above the recent two-year low on the yen on Friday after suspected yen-selling intervention by Japan made investors cautious ahead of a weekend meeting of the Group of Seven finance ministers in France. The greenback dived to 115.25 yen in early New York trade on Thursday but quickly jumped more than half a yen, leading traders to believe Japan was selling yen for dollars to curb export-damaging yen strength. In common with recent practice, there was no confirmation from Japan. Markets are now eager to see how the United States will react after U.S. Treasury Secretary John Snow recently criticized the use of intervention to fine-tune economic growth.
Snow and Japanese Finance Minister Masajuro Shiokawa are scheduled to meet ahead of the G7 meeting at 10 a.m. EDT. Shiokawa has said however he had no plan to discuss foreign exchange. "It is interesting to see aggressive intervention by Japan when the market expected the otherwise due to political reasons ahead of G7 meeting and particularly after Snow's comments," said Shahab Jalinoos, currency strategist at UBS Warburg. "But Japan will carry on intervening. The U.S.-Japan relationship is not damaged by Japan's action -- the U.S. has bigger fish to fry at the moment, such as Iraq issues, and it needs political support from Japan." By 3:45 a.m. EDT the dollar trudged along a narrow path around 116.32 yen, keeping distance from the 115 mark -- a key option level, which, if broken, could accelerate the dollar's slide. The euro was resting quietly at $1.14, off Monday's four-year peak above $1.16. Against the yen it was also steady at 132.65 yen, near the previous day's one-week low.
DEFLATIONARY PRESSURE
Investors were focused on how the United States and Japan would paper over the apparent gap in foreign exchange views at the meeting of G7 finance ministers this weekend, or in a bilateral meeting on the sidelines. "I don't think the two ministers will fight till they're red in the face," said Tomomasa Noguchi, forex manager at Mitsubishi Corp in Japan. "Perhaps they will try not to attack each other, which will benefit the dollar." Some analysts say with a greater worry about deflationary pressure in the United States, Washington could be more unwilling to allow Japan to push the dollar significantly higher against the yen, given the impact on U.S. exporters. Investors are keenly awaiting the April U.S. consumer price index (CPI), due at 8:30 a.m. EDT, especially after the Fed warned of the potential for deflation in the U.S. economy last week.
Core April CPI is expected to rise 0.2 percent compared with a 0.0 rate in March. "If we get a number below 0.1 it would increase the chance of the Fed cutting again, and that will put pressure on the dollar," Jalinoos said.//