TOKYO, Feb 12 - The dollar hovered near a record low against the euro on Thursday after a sharp sell-off prompted by U.S. Federal Reserve Chairman Alan Greenspan's comment that he was not too concerned by the effect of its weakness on inflation. The market dumped the dollar as it took the powerful central banker's words to mean interest rates in the United States -- where the key Federal funds rate is at 1.0 percent, the lowest since 1958 -- would stay unchanged for the time being. For investors that means there are safe but higher returns to be found outside the United States. The appeal of dollar assets pales in comparison to the two percent found in the euro zone, four percent in Britain, 2.50 percent in Canada and 5.25 percent in Australia and New Zealand.
Last weekend's statement by the Group of Seven warning against excess market volatility was seen as giving Japan some vindication for its policy of intervening to curb the yen's rise. That is likely to be why the dollar has fallen less against the yen, but at the same time the euro's rise has aroused anger in Europe, where its lopsided strength against the greenback is sapping the region's export competitiveness. "Dollar/yen is trading very quietly in Asia because the BOJ (Bank of Japan) seems to be selling yen in the 105.30 area," said Yoshiharu Yanagisawa, treasury manager at State Street Bank and Trust in Tokyo. "While it has been quiet, we have seen some Japanese investors buying yen against the dollar and other major currencies because the repatriation trade is increasing due to (Japan's financial) year-end seasonal factors. That is why it is stuck in a very tight range," he added. The Fed chief, in his twice-yearly report on monetary policy to the U.S. House of Representatives Financial Services Committee, said the dollar's decline should help narrow the bulging U.S. current account gap. He dismissed concerns about the dollar's weakness, saying the inflationary impact of the dollar's slide had been minimal so far because foreign exporters were hedging their profit margins and so were not passing on higher prices to U.S. consumers. "Greenspan usually refrains from talking about forex issues," said Toshihiro Azuma, forex manager at Sumitomo Trust and Banking. "So when he spoke about it openly, showing little concern about the dollar's fall, it was taken to mean he approved of the dollar's fall." By late afternoon in Tokyo the euro was down slightly at $1.2822 , below a one-month high of $1.2846 hit in early Asian trade. The euro shot up more than one percent on Wednesday after Greenspan's comments. Many traders expect the euro to test its all-time high around $1.29. The dollar appeared glued to the 105.30 yen area, slightly below late Wednesday U.S. levels around 105.45 yen but off a three-year low of about 105.16 yen set on Wednesday.
Market players expect the dollar to fall against the yen eventually given huge selling pressure from Japanese exporters repatriating profits as well as foreign investors buying Japanese assets. But Japan's top financial diplomat, Zembei Mizoguchi, repeated on Thursday his country's readiness to take action against excessive moves in the currency markets. The Ministry of Finance said on Thursday that net purchases of Japanese bonds by foreigners rose to 1.3344 trillion yen ($12.66 billion) in January, the highest level since January 2001 and more than twice their buying in December. They also poured money into Japanese stocks, buying 1.4642 trillion yen ($13.9 billion) in net terms in January. "Foreign investors are buying Japanese shares because corporate profits are increasing. Their buying is expected to continue," said Tohru Sasaki, chief foreign exchange strategist at JP Morgan Chase in Tokyo. "I think it's a matter of time before the dollar falls below 105 yen," he said. While investors poured money into Japanese assets, the Japanese government upgraded its view on machinery orders after a stronger-than-expected 8.1 percent increase in December data versus economists' estimates for a two percent rise.//