27 August 2003, 16:48  Euro bounces off lows, yen cools after warning

LONDON, Aug 27 - The euro bounced from this week's five-month trough on the yen and four-month low on the dollar on Wednesday as investors paused to assess global recovery prospects after punishing the single currency in recent weeks. The yen fell from this week's highs against major currencies as comments by Japan's top financial diplomat criticising recent currency market volatility made investors cautious ahead of a visit by U.S. Treasury Secretary John Snow to Japan from Sunday. No major economic data was due, while debt markets, whose losses helped drag the euro lower this month, were also quiet ahead of a $25 billion U.S. Treasuries auction later, resulting in a temporary but broad-based recovery of the single currency.
"The market is taking a break... but the asynchronous state of the global economic recovery is creating a lot of trading opportunities. In the past, the euro rallied by default because there was nowhere else to invest. Now, anywhere else is better," said Stephen Jen, chief currency economist at Morgan Stanley. "The market is slowly and grudgingly accepting the Japan recovery story but the BOJ will do everything they can to stop the yen rise. However, I don't think the U.S. will allow Japan to intervene as much if Japan's fundamentals continue to improve." At 1145 GMT, the euro stood at 128.64 yen , up more than a full yen from the U.S. close, after falling to 126.72 on Tuesday. Against the dollar it was at $1.0933 , almost a cent above Tuesday's four-month lows. The yen stood at 117.75 per dollar after reaching a five-week peak of 117.10 on Monday.
IMF WARNING
The International Monetary Fund, in its draft World Economic Outlook, warned of a risk of "disorderly" exchange rate movements resulting from the high U.S. current account deficit. It also sees the U.S. budget deficit reaching 6.1 percent of GDP in 2003, with a structural deficit of 5.2 percent of GDP. The U.S. government is financing a record federal budget deficit, which the U.S. Congressional Budget Office pegged on Tuesday at $480 billion for 2004. The U.S. Treasury auctions $25 billion of two-year notes later on Wednesday. "The U.S. current account deficit does carry risk of destabilising adjustment sometime in the future but at the moment it is still being financed easily," said Mary Davis, global FX strategist at Credit Suisse First Boston.
JAPAN'S DILEMMA
Extending recent gains, Tokyo stocks <.N225> reached their highest intraday level since July 2002 though late profit-taking pushed them lower by the close. Pro-cyclical Japan is considered likely to be the main beneficiary of a U.S.-led recovery as the country relies on exports to the United States and Asia. In fact, Japan's second-quarter growth far outpaced the euro zone and came close to the United States, making it harder for Japanese authorities to explain to the United States and its Asian neighbours their need to intervene aggressively. Japan's top financial diplomat Zembei Mizoguchi on Wednesday said the euro was correcting from excessive gains but that rapid movements were undesirable.
"Japan wants to ensure the recovery stays on track. As far as the U.S. is concerned they prefer to see a strong Japanese economy even if it comes at the cost of Japan intervening to prevent the yen strength," Davis said.//

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