LONDON, Oct 29 - The yen rose to a three-year high against the dollar on Wednesday on strong Japanese data and the U.S. unit also fell on the euro, scaling back the previous day's stock-fuelled gains after the Federal Reserve left rates steady. With the Fed looking set to keep rates stable for a while, analysts noted the main beneficiaries were higher-yielding currencies and those expected to capitalise on U.S. growth prospects, like the yen and the Australian and New Zealand dollars. The New Zealand dollar hit a fresh six-year high above US$0.6150 and the British pound, fuelled by expectations of higher domestic interest rates, climbed to a new five-year peak at $1.7082 . "If you go to, say, Australia, you will benefit from the U.S. growth story as (countries like) Australia are going to grow which is good for the return on your investment," said Peter Fontaine, currency strategist at KBC in Brussels. "They also have higher interest rates which they are not inclined to let drop so you can feed off two possible benefits. The U.S. dollar is not really improving on the Fed decision and other currencies are shifting their positions." By 1115 GMT the dollar was hovering just above its latest three-year low below 107.90 yen , with traders suspicious the Bank of Japan might be quietly preventing further losses. Market sources said the central bank may have been in selling yen for dollars in Asian trade but this could not be confirmed. The euro dipped to eight-week lows against the yen for a second straight day, at 126.13 . But it gained half a percent against the dollar to $1.1718 , peeling back from six-day lows hit on Tuesday when the dollar enjoyed a stock-inspired rally against European currencies in the wake of upbeat U.S. data and the Fed decision.
FED'S BENEFICIARIES
In its Tuesday statement the Fed was more optimistic about the economy, saying the U.S. labour market "appears to be stabilising", and repeated its belief that interest rates, currently at one percent, could be kept low for "a considerable period". In contrast, UK rates are 3.5 percent and widely expected to rise next week, while Australia has interest rates at 4.75 percent and New Zealand at 5.0 percent. In Japan, where rates are still around zero, industrial output rose 3.0 percent in September from a month earlier, the biggest gain since May 2002 and much higher than forecast. The data helped lift the Tokyo stock market's benchmark Nikkei average <.N225> 1.69 percent, fuelling speculation that strong inflows of foreign funds to Japanese stocks would continue, supporting the yen. Some analysts said upbeat economic data in Japan had intensified expectations U.S. Treasury Secretary John Snow would criticise Japan and China on Thursday for holding their currencies down against the dollar to gain export advantage. Snow goes before the Senate Banking Committee on Thursday to testify on a Treasury report on international economic and exchange rate policy.
"The industrial production data underpinned the yen, the Nikkei is up and there may be some long yen positions ahead of tomorrow's foreign exchange report," said Derek Halpenny, currency economist at Bank of Tokyo-Mitsubishi. Japan and China are not the only countries concerned about the impact of a rising currency. The European Commission warned a renewed sharp rise in the euro could undermine euro zone activity, which it said seemed already to have eroded export price competitiveness. It also highlighted the fact that Asian central banks have been big dollar buyers, noting they appeared committed to preventing it from depreciating sharply. The market's focus is also turning to Thursday's release of U.S. third-quarter gross domestic product data. Economists' consensus forecasts are for a rise of six percent. Several Federal Reserve members make speeches on Wednesday, including chairman Alan Greenspan, although the topic is payments systems rather than monetary policy-related.///