LONDON, Sept 17 - The yen rose to one-week highs on the euro and held near two-week peaks on the dollar on Wednesday, helped again by another solid performance on Tokyo's stock market that took the Nikkei to a 15-month closing high. Markets wondered if the Bank of Japan might try to curb this week's steep rise in the flyaway currency to protect domestic exporters, but the fact the Nikkei stock average <.N225> cleared 11,000 for the first time since July 2002 made it difficult for many investors to part with yen. Tuesday's widely anticipated decision by the Federal Reserve to keep interest rates unchanged was seen as mildly supportive for the dollar as it helped U.S. stocks soar. But the greenback appeared to be playing second fiddle to the yen for now.
"There still seems to be this perception of euro/yen leading the move, with the Nikkei trading above that 11,000 barrier," said Jeremy Stretch, senior currency strategist at Royal Bank of Canada Capital Markets. "We are still seeing a recycling (of funds) out of European bonds into Japanese stocks. That's providing impetus in the yen." At 0930 GMT the yen was just a touch firmer versus the euro on the day, after having risen as high as 129.29 yen , its best level since September 9. It rose nearly three yen on the euro on Tuesday.
The yen was flat on the dollar after rising as far as 116.01 yen . A move beyond 115.99 would be its best level since September 4. It shot more than one yen higher on Tuesday. Sterling gained against the dollar and euro after minutes from the Bank of England's rate meeting in early September showed some policymakers starting to look for an interest rate rise. Wednesday's economic calendar includes euro zone August consumer price data at 1000 GMT, a speech by European Central Bank executive board member Eugenio Domingo Solans at 1200 GMT and U.S. housing starts at 1230 GMT. Also, Norway's central bank delivers its rate decision at 1200 GMT.
TOKYO SIZZLES
Strong Tokyo equities were seen attracting demand from a broad range of investors with European fund managers rebalancing portfolios to increase their weighting in Asian currencies. The Nikkei average <.N225> ended trade up 0.95 percent at 10,990.11, its highest finish since June 13 last year. Institutional investors were also 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. But intervention was also on traders' minds after the yen rose beyond the 116 level on Tuesday, seen by many analysts as a potential breaking point for Japanese authorities. Although Japan's economy has showed signs of improved health, Japanese authorities are concerned a rising yen could threaten a budding export-led recovery, a major motive behind Tokyo's moves to muzzle the yen.
Bank of Japan Governor Toshihiko Fukui renewed his drive to calm bond markets concerned about rising long-term interest rates, saying that the bank was not about to change its ultra-loose monetary stance. Fukui also reiterated his cautious view of the Japanese economy, saying domestic demand remained weak and banks must try harder to improve their financial health despite a widespread view that business conditions are improving.
CHEAP MONEY IN THE U.S.
U.S. stocks rallied overnight after investors took comfort from the Fed's decision to keep rates low and were reassured that borrowing costs would not rise for some time. In its closely watched statement after the rate meeting, the Fed said that rates would stay low for "a considerable period" as the economy improves but continues to haemorrhage jobs. "The market might be a little concerned about what they said about the labour market. But it's a bit of a mixed bag because the U.S. equity market liked it -- so in that sense it's a dollar positive story," said Paul Mackel, currency strategist at ABN Amro in London.//