LONDON, Jan 16 - The dollar fell to a three-year low on Friday before recovering some of its losses on suspected Bank of Japan intervention, while the euro extended this week's losses to a two-week on the greenback. European Central Bank chief economist Otmar Issing became the latest euro zone official to express concern about the euro's 20-percent rise on the dollar over the past year, helping drive it to a one-month low on the yen. Euro zone officials have made plain they dislike rapid strengthening in the euro. Suspected Bank of Japan intervention and comments from Ministry of Finance officials have also reminded the market Japan is unhappy with export-damaging yen strength. "A lot of profit taking on positioning is going on because the euro has come long way and the (eurozone officials') rhetoric is helping. There is still demand to buy yen and Japan, although the Bank of Japan is ready to intervene," said Mary Davis, global currency strategist at CSFB. "The gap in monetary policy management in the U.S. and the euro zone will persist. The net result is that the dollar's recovery is unlikely to go that far."
By 0900 GMT, the euro was trading near the day's low around 132.38 yen , down nearly one percent on the day, and $1.2495 , off about 0.6 percent. The dollar was 0.4 percent down on the day at 105.92 having hit a low around 105.70 before suspected Bank of Japan action pulled it higher.
JAPAN'S DISPLEASURE
A source from Japan's Ministry of Finance said there was no change in its stance to act appropriately on excessive foreign exchange moves. This followed comments from Finance Minister Sadakazu Tanigaki earlier, who reiterated that Tokyo would take decisive action in the currency market to counter any overshooting in exchange rates. Analysts noted the dollar had recovered ground against other major currencies like sterling and the Australian dollar in recent days but had made almost no progress against the yen. "For one thing, the decline in recent months against the yen had been relatively small because of intervention. In addition, there is concern that such intervention could come under criticism at the upcoming G7 meeting," said Masamichi Koike, head of spot forex trading at Sumitomo Mitsui Bank in Tokyo.
FLORIDA AND BRUSSELS
Later on Friday, the United States releases data on industrial production and a University of Michigan consumer sentiment survey. But the market's main focus is still on how policymakers from the Group of Seven industrial countries will react to the dollar's weakness at the meeting in Florida on February 6-7. G7 deputy finance ministers from each country are meeting in Brussels on January 26 to work on the agenda for the February meeting. Japan is expected to be particularly vocal in complaining about the export-damaging yen strength and analysts see Japan's stance has become more hawkish following the recent increase in the government's war chest for intervention. A survey by the Ministry of Economy, Trade and Industry showed most Japanese companies are concerned about the impact of a stronger yen on the economy if the dollar stayed around 100-105 yen over the medium term. The survey showed the average breakeven level for the respondents, who are mainly manufacturers, was 111 yen per dollar. Many euro zone officials have warned this week about the euro's rapid rise against the dollar, with the latest comment coming from the ECB's Issing who said the ECB was not ignoring the euro's strength and was worried. But apparent nonchalance about the dollar's fall on the U.S. side has fanned expectations Washington is comfortable with a weaker currency. This view was highlighted by Japanese trade minister Shoichi Nakagawa said he thought U.S. authorities did not really want a strong dollar despite Washington's official stance to the contrary. "Priorities of Japan, the euro zone and the U.S. are different but the U.S. doesn't have much interest in making a statement designed to curb the dollar's fall because it helps that the U.S. has a weaker currency," Davis said.//