TOKYO, June 26 - The dollar drifted higher against the yen on Thursday helped by worries about Japanese intervention after the Federal Reserve's rate cut failed to give the market clear direction. U.S. stocks and Treasuries reacted negatively to the central bank's cut of 25 basis points to a four-decade low of one percent, but the foreign exchange market was unfazed. By 0200 GMT, the dollar was at 118.06 yen after firming to the day's high of 118.31. It was at 117.93 in late U.S. trade. The euro was flat at $1.1531 . Against the yen, it was also steady at 136.13 yen versus 136.11 yen. "The market is watching whether the Fed will cut rates in the future. But in the near term, with the Fed's decision out of the way, dollar/yen is seen supported by intervention caution," said Shogo Nagaya, forex manager at Nomura Trust and Banking. On Wednesday, the dollar spiked up from around 117.40 yen to above 118 yen on speculation that Japan had intervened. "I get the feeling that the Japanese authorities are uncomfortable when the dollar is under 118 yen," said a trader at a Japanese bank. Finance Ministry officials declined to comment on whether the government had intervened. MIXED SENTIMENT Sentiment for the greenback was mixed with the market reluctant to bid the currency too strongly as the Fed left open the option of cutting interest rates further if inflation dips more than expected, dealers said. The Fed reduced its funds rate to a low last seen in 1958, but the market had been leaning toward a half-point reduction. The Fed, in a statement following the cut, said it saw firmer spending, improved financial conditions and signs of stabilising labour markets. But it also noted the economy had yet to show sustainable growth. "I think that the Fed's view was pretty bullish," said Koichi Abe, manager at Aozora Bank's forex trading section.
"If the stock market heads up again, it could prove that they were right and might lead to dollar-buying." Dealers said the market is now focusing on whether the European Central Bank (ECB) will ease further following its 50 basis point cut in the benchmark interest rate to two percent earlier in the month. Ernst Welteke, a member of the ECB governing council and president of the Bundesbank, said inflation in Europe would have to fall even further over the medium term before interest rates in the euro zone could come down any further. He made the comment in an interview released on Wednesday by German daily Boersen-Zeitung.//