TOKYO, Sept 17 - The yen stayed near two-week highs against the dollar on Wednesday on buoyant Tokyo stocks and expectations of a blossoming economic recovery, but gains were limited by wariness of intervention. Rumours that European fund operators were rebalancing portfolios to increase the weighting in Asian currencies, including the yen, also worked in favour of the Japanese unit.
It found some more support from the view that Japan may avoid intervening before this weekend's Group of Seven meeting in Dubai amid mounting international concern about currency manipulation. "This (view) has increased yen bullish sentiment and pushed the yen higher," said Toru Umemoto, currency strategist at Morgan Stanley. Although Japan's economy has showed signs of improved health, a rising yen against the dollar could threaten to stymie a budding export-led recovery, a major motive behind Tokyo's moves to muzzle the yen. That interest in stemming the yen's rise is unlikely to abate even after the G7 meeting, a view reinforced by fresh verbal warnings on Wednesday from Japan's top financial diplomat, Zembei Mizoguchi, that the government would intervene if necessary. Dealers were cautious about selling the dollar below 116 yen due to fears the Bank of Japan would step in to stem the yen's advance beyond that level. "I don't think operators will want to sell the dollar below 116 yen, but its downswing could pick up pace if it breaks through the previous low of 115.75 yen," said Hideaki Furumaya, head of the corporate desk at Trust and Custody Services Bank.
The dollar at 115.75 yen was the low hit on September 4 and the level where the BOJ was suspected to have resumed intervention after refraining from such action in August. At 0248 GMT, the greenback stood at 116.22/25 yen compared with 116.10/20 yen in late New York on Tuesday. The dollar hit a low of 116.02 in post-Asian trade on Tuesday.
RED-HOT STOCKS
The red-hot Nikkei stock average <.N225> is likely to keep the yen at high levels after breaking through the closely watched 11,000 level. It was up 1.41 percent at 11,040.66 at midday. The yen stayed strong across the board, bought heavily against European currencies as non-Japanese fund operators were seen interested in adding more Japanese stocks to their portfolios, traders said. The euro dropped more than two percent versus the yen on Tuesday after rising as high as around 132.60 yen. Japanese exporters were also detected selling actively, while institutional investors were rumoured to be collecting profits in euro-denominated bonds to cover losses in Japanese government bonds ahead of half-year book closings at the end of September, dealers said. The euro was quoted at 129.74/80 yen against Tuesday's 129.81/92 yen. The single currency edged down to $1.1160/65 against $1.1171/77. The market showed little reaction to a Federal Reserve decision to leave interest rates steady at 45-year lows. The Fed held its benchmark rate to one percent, as expected, and again warned about the risks of disinflation.//