LONDON, Jan 28 - The dollar struggled below 106 yen on Wednesday, nearing the previous day's three-year low as suspected Japanese intervention failed to deter mounting selling pressure on the greenback. The immediate market focus was on the battle between dollar bears and the Bank of Japan but traders were also awaiting the outcome of the U.S. Federal Reserve's monetary policy meeting later in the session for clues as to how long U.S. interest rates would remain on hold. The greenback surged nearly one yen in late Tokyo trade, making dealers suspect authorities had taken action, although no confirmation was available as to whether the BOJ had intervened to buy dollars for yen. "It has the typical footprints of the BOJ. The story is how quickly it's come back which is indicative of the forces at play in the market which is fighting the BOJ tooth and nail," said Neil Mellor, currency strategist at Bank of New York. "It's in keeping with the notion that they are trying to smooth the downward adjustment."
By 0900 GMT the dollar was holding at 105.83 yen , just above Tuesday's three-year low around 105.45 yen. Against the euro it was up a third of a percent on the day at $1.2590 , having shed around 1-1/2 cents on Tuesday, when signs of labour market weakness in a U.S. consumer confidence report pressured it lower. Sterling was steady on the dollar and a third of a percent higher on the euro after Prime Minister Tony Blair narrowly avoided defeat in a parliamentary vote late on Tuesday and a newspaper said on Wednesday he had been exonerated in an inquiry into the suicide of a UK weapons expert last year.
JAPAN RETURNS TO MARKET
The dollar suddenly jumped in late Asian trade after the central bank was suspected of buying the dollar at about 105.80 yen and appeared to be intervening repeatedly to prevent the yen's resurgence, traders said. The greenback leapt to a high of 106.65 yen shortly after the suspected BOJ action before falling back below 106 and a senior currency trader in Tokyo said the central bank appeared to have been intervening through several Japanese banks. "One major Japanese bank was detected bidding heavily and other Japanese banks followed. Those heavy bids are most likely backed by the BOJ's orders," the trader said. A finance ministry source declined to comment on the dollar/yen spike up, but said Japan's foreign exchange policy remained unchanged. Earlier Japan's Finance Minister Sadakazu Tanigaki said recent moves in the currency market were slightly rapid and that Japanese authorities would act against any overshooting. The yen was boosted in recent days by talk that a February meeting of Group of Seven finance ministers would result in pressure on Asia to let their currencies rise to help correct global imbalances. "Everyone was expecting them to abstain from the market and the fact that they've come straight back in really makes the forthcoming G7 meeting particularly interesting as the euro zone contingent is likely to have something to say about it," Mellor said.
FED ON HOLD
The Fed's Open Market Committee is due to announce its rate decision at 1915 GMT. No change is expected in U.S. rates, currently at a 45-year low of 1.0 percent. Instead the focus is on how the Fed will characterise the pace of activity in the world's largest economy. Analysts expect it will say the economy is improving solidly, inflation is low and labour markets improving only modestly, meaning rates will be on hold for a "considerable period", as in its previous assessment. "There may be some risk (for euro bulls) going into the FOMC tonight, especially if the Fed sounds more positive on the economy," said Paul Mackel, currency strategist at ABN AMRO. U.S. data later includes durable goods and new homes sales. In Britain, sterling was buoyant after Blair staved off defeat in parliament by a tiny margin on Tuesday. The Sun newspaper reported on Wednesday that an eagerly awaited report into the suicide of arms expert David Kelly cleared Blair of dishonourable conduct. If the newspaper's leak proves correct it will provide relief for Blair after the toughest 48 hours of his premiership. Lord Hutton will read a summary of his report at 1230 GMT.//