LONDON, July 2 - The yen advanced solidly against the euro and dollar on Wednesday on the back of storming gains in Tokyo stocks, while the greenback was stuck in a period of consolidation against the single currency after falls this week. Tokyo's Nikkei average <.N225> jumped three percent, its biggest gain in seven months, giving the Japanese currency a rare run of economic optimism after Tuesday's better than expected Tankan corporate sentiment survey.
"The main activity is going on in the yen, where the rampant tone to Japanese equities is providing yen buying. Obviously foreign investors have caught that move quite well," said Steven Pearson, chief currency strategist at Halifax Bank of Scotland Treasury Services. "Euro/dollar has slipped back as the intensity of yen buying is greater versus the euro than the dollar." By 1015 GMT, euro was down two-thirds of a percent against the yen at 137.19 yen . The dollar was down over a third of a percent from its last close, at 118.89 yen . The dollar was up a touch from the previous session's close against the euro at $1.1541 , recovering from a spike lower to $1.16 following Tuesday's manufacturing report from the Institute for Supply Management.
YEN FOCUS
Dealers say Japanese stock market gains, fuelled by Tuesday's optimistic Tankan survey, were clearly pushing the yen higher. "In a word, it's the Nikkei," said Derek Halpenny, currency economist at Bank of Tokyo Mitsubishi. "Generally the Tankan report was far better than expected. There is improving optimism that Japan is likely to recover in line with a recovery with the U.S." The survey said Japanese companies showed unexpected resilience in the face of a sluggish global economy in the latest three months, growing less pessimistic about their prospects as the effects of the SARS virus and war in Iraq faded away.
Dealers said the yen could be capped by market wariness of yen-selling intervention by Japanese authorities, who have frequently stepped covertly into the market this year to halt the unit's strength and protect export competitiveness. Analysts believe Japanese authorities will not allow the yen to strengthen beyond 115, though the optimistic reasons for the currency's current rise may moderate its activity somewhat. "The intervention story is not going to go away," Halpenny said. "Japanese authorities want to ensure we avoid a move through 115. The question is whether they would intervene at current levels given foreign investors' interest in Japanese equities. One would question that."
DOLLAR CONSOLIDATION
Tuesday's Institute of Supply Management (ISM) report showed U.S. manufacturing activity in June contracted, albeit at a slower pace than in May, disappointing economists who were betting on an expansion in the hard-hit sector. But the data failed to send the dollar sustainably lower with investors eager to take heart from a rise in new orders included in the ISM figures. "We are in a very tight range. But on balance the reaction to the weak ISM data suggested markets are still prepared to be optimistic about U.S. growth prospects," said Jalinoos. All eyes are now on Thursday's U.S. unemployment report for June. Before that, U.S. Federal Reserve Chairman Alan Greenspan makes opening remarks at a Federal Reserve Bank of Philadelphia exhibit at 1700 GMT on Wednesday. The U.S. Commerce Department is expected to report at 1400 GMT that factory orders were flat in May after dropping 2.9 percent in April. The European Commission said on Wednesday the euro's rise on the foreign exchanges will hit exports, but the move has been in line with economic fundamentals and is beneficial overall for the euro zone economy.//