20 January 2004, 10:34   Dollar keeps most gains, but BOJ easing effect fades

TOKYO, Jan 20 - The dollar steadied against major currencies on Tuesday, holding on to most of the previous day's impressive gains as investors grew uneasy about battering the greenback before the Group of Seven meeting next month. The dollar hit a fresh two-week high of 107.62 yen immediately after the Bank of Japan (BOJ) surprised the market by easing its already super-loose monetary policy. But the U.S. currency soon settled back to trade at 107.48/53 yen by 0625 GMT -- no surprise to analysts. "Theoretically, the BOJ's decision will not have any effect on the forex market as no matter how much money the BOJ injects, it is stuck at banks and does not flow out to companies," said Toru Umemoto, currency strategist at Morgan Stanley Japan. "Everybody knows that, so it's a big question why the BOJ raised the target ceiling of current account deposits," he said. The BOJ announced the easing by raising the target for excess liquidity in the banking system -- as measured by banks' current account deposits held at the central bank -- to 30-35 trillion yen ($280-326 billion) from 27-32 trillion. "I think the decision was prompted by the strong yen, and there were two main factors -- its impact on the economy, and the difficulty of money market operations caused by massive amounts of yen-selling intervention," said Kiichi Murashima, economic and market analysis director at Nikko Citigroup.
"I think the latter might have had a larger influence on the BOJ's move this time," he said. Vice Finance Minister Keiichi Ishii said that the BOJ Policy Board also looked into the possible economic impact of a higher yen. Ishii, who was a government representative at the meeting, also said the government asked the BOJ board to consider steps to wipe out bearish sentiment on deflation among consumers and businesses which in itself fuels price declines.
DOLLAR OUTLOOK IN DOUBT
Analysts said the dollar's push higher had been expected after harsh sell-offs in recent months, and it did not suggest a long-term turnaround in the dollar's overall retreat. "The US current account deficit and other problems will not disappear," said Junya Tanase, forex strategist at JP Morgan Chase. "I regard the bounce as a healthy recovery." The dollar's rise against the euro was helped by growing concerns among European officials about the single currency's sharp gains just a few weeks before the G7 meets on February 6-7. It also got a boost from market relief about steady capital inflows into U.S. assets, dealers said. The euro was traded around $1.2390 , down about four percent from last week's life highs near $1.29. The market was still digesting Monday's comments by euro zone finance ministers and the European Central Bank (ECB) about their worries over exchange rate volatility. The ministers and the ECB made no mention of the "strong and stable" euro mantra previously used and instead stressed their discontent about the pace of euro gains. "These are very fuzzy comments, but the fact that they spoke out about the euro is significant, particularly ahead of the G7 meeting," said Mitsuo Imaizumi, deputy general manager of international bonds and forex at Daiwa Securities SMBC. Behind European officials' concern was a potential loss of export competitiveness that could choke off economic recovery. The market will be closely watching remarks from ECB Chief Economist Otmar Issing, who is scheduled to testify before the European Parliament's Committee on Economic and Monetary Affairs at 1400 GMT. U.S. President George W. Bush is to deliver his State of the Union speech later in the day, but many dealers said it was unlikely to move the forex market. ($1=107.30 yen) ($1=.8093 euro)//

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