TOKYO, June 5 - Expectations of a hefty rate cut by the European Central Bank prompted dealers to dump the euro against major currencies on Thursday, working as a drag on the dollar against the yen as well. The once high-flying euro extended losses to break the 138 yen mark, hitting a two-week low of 137.72 yen as offshore players rushed to buy the Japanese currency in the run-up to the ECB's rate-setting meeting later in the day. The fall in euro/yen also put pressure on the euro against the dollar, prompting the single currency to move closer to crucial support at $1.16. "We've been seeing such euro-selling every day but it seems like U.S. investment banks are selling the euro now," said Kosuke Hanao, head of foreign exchange at Royal Bank of Scotland in Tokyo.
Dealers have been squaring positions ahead of the rate verdict as the majority of players are betting on a 50-basis point cut from the current benchmark rate of 2.50 percent. "The market has pretty much factored in a 50 basis-point cut," Hanao said. A rate reduction will take some shine off the single currency, because interest rate differentials between the euro zone and the United States will narrow. The U.S. fed funds rate is now at 1.25 percent. ECB President Wim Duisenberg and Federal Reserve Chairman Alan Greenspan both hinted at lower interest rates from their respective banks in remarks made on Tuesday. The ECB rate announcement is due at 1145 GMT.
DEALERS EYE MORE CUTS
Traders say further ECB rate cuts may be down the road. "Even if the ECB cuts rates by 50 basis points, I think they'll still have a feeling that they haven't completely emptied their bladder yet," said a dealer at Mizuho Corporate Bank. At 0228 GMT, the euro was trading at 137.84/96 yen , compared with 138.32/48 yen in late New York. Against the dollar, the euro was quoted at $1.1638/43 , versus the U.S. close at $1.1639/45. Trading in dollar/yen was mostly driven by moves in the euro as the market lacked other factors to trade on. The dollar's downside is firmly supported by fears of Bank of Japan intervention with some dealers saying that the Japanese authorities were probably intervening on Thursday. Hiroshi Watanabe, head of the Finance Ministry's international bureau, said on Wednesday that the ministry would stay vigilant against speculative currency market movements that pushed the yen higher. Japan conducted the largest ever monthly volume of yen-selling currency intervention in May, totalling some four trillion yen ($33.66 billion), to stem the currency's rise. Separately, Bank of Japan Policy Board member Toshikatsu Fukuma said on Thursday that a weaker dollar would pose uncertainties on the domestic and overseas economies. The dollar was quoted at 118.44/49 yen , compared with 118.81/89 yen in late New York trading.//