LONDON, Jan 6 - The dollar stumbled to a new record low against the euro on Tuesday but managed to hold above the previous day's three-year low on the yen as traders detected Bank of Japan intervention to lend it support. A series of sharp spikes higher in the dollar against the Japanese currency convinced some dealers that Japan's authorities were buying the greenback versus the yen in the latest round of official intervention aimed at protecting domestic export competitiveness. However, the dollar was seen suffering more, despite pressure from Japan, on the back of persistent concerns over the U.S. current account deficit, prospects of continued low interest rates in the United States and worries over the U.S.'s ability to fund its external shortfall. "What we are seeing is a continuation of a trend," said Mitul Kotecha, head of global foreign exchange research at Credit Agricole Indosuez in London. "Dollar weakness is visible across the board and there is not a great deal of independent action going on in the markets. The exception is where we see intervention and Japan is now preventing the dollar from falling below 106." By 0900 GMT the dollar had fallen as low as $1.2725 per euro , its lowest level since the single currency's launch five years ago.
During Asian trade the U.S. currency spiked up to 106.40 in two quick jumps from session lows just above 106.00, sparking talk that the BoJ was buying dollars and selling yen. There was no official confirmation of any intervention. On Monday, the dollar fell to a three-year low just above 106.00, after breaking through support around 106.60/70 which had underpinned it for the past month. "I think they are intervening today. It's almost certain," said a dealer at a Japanese bank. Sterling also clocked a fresh 11-year high against the embattled greenback, peaking at $1.8155 .
JAPAN FIGHTS BACK
There was little new information for markets to trade on, but few investors were willing to hold dollars on expectations that the currency's problems were not going away soon. Such views were reinforced after U.S. Federal Reserve Board Governor Ben Bernanke said late on Sunday that the Fed was justified in holding interest rates at 45-year lows even though the U.S. economy seems to have improved. The prospect of interest rates remaining low is likely to encourage investment outflows from the dollar to higher-yielding currencies at a time when the United States needs capital inflows to cover its current account deficit. But dollar weakness was causing jitters in Japan, prompting a wave of criticism from Japanese officials. Both Finance Minister Sadakazu Tanigaki and Zembei Mizoguchi, vice finance minister for international affairs, said Japan would act against sudden or speculative currency moves. Meanwhile, Hiroshi Okuda, chairman of the Japan Business Federation, said that it was vital for Japanese firms exporting to the United States that the dollar stayed above 105 yen. The federation is Japan's biggest business lobby. Still, some market players thought that Japan would allow the yen to appreciate given the falling dollar and Japan's economic recovery. "It (intervention) is not outright protectionism," said Naomi Fink, senior currency strategist at BNP Paribas in Tokyo, adding she suspected that the goal of intervention was to allow exporters' profits to catch up with the strengthening yen. "Positioning remains very overstretched...if we didn't see any correction at year-end, when we usually see some flattening out of positions, it's hard to see a correction taking place now," she said. Later in the day, the U.S. Institute for Supply Management December survey of non-manufacturing activity is due at 1500 GMT. According to a poll it is forecast at 61.3 from November's 60.1. U.S. factory orders numbers for November were also scheduled for release at that time. In the euro zone, services sector expansion slowed in December with the euro zone purchasing managers' index falling to 56.6 from 57.5 in November, although still above the 50 mark which divides contraction from expansion.//