LONDON, Feb 2 - The dollar held just above a recent three-year low against the yen on Monday with the market wary of intervention from the Bank of Japan (BoJ) after, traders suspected, it acted earlier in the session. The spectre of a key meeting by the Group of Seven (G7) industrialised nations later this week hung over the market, with investors unwilling to take major positions until they knew how the G7 would react to persistent weakness of the dollar. The dollar has won some ground against the euro in the run-up to the meeting in Florida this Friday and Saturday, which will be closely watched, and analysts widely expect it to trade in narrow ranges in the final days. "The G7 will be the main issue throughout this week," said Ian Gunner, head of foreign exchange research at Mellon Bank in London. "The key question is whether the United States will agree to put its name to a statement that will have words like 'excessive movements are undesirable'," he said. At 1035 GMT, the dollar was unchanged against the euro at $1.2460 and the yen at 105.65. Many traders suspected the BoJ, which spent a record 7.15 trillion yen ($67.2 billion) to prop up the dollar in January, was intervening again on Monday in the 105.60 yen area, and wondered whether European officials would complain at the G7 meeting.
"Europe may well try and imply that to the extent that the dollar needs to adjust further, Asia should take more of that burden, so obviously that would put more presure on Japan," said Shahab Jalinoos, senior currency strategist at ABN AMRO. The euro was little moved by news that the euro zone manufacturing sector grew a little faster in January, but analysts said the data was euro-supportive. "Because they were good numbers, that would make the market more confident that a strong euro isn't really hurting Europe's recovery yet, so that's good for the euro," Jalinoos said. The Eurozone Purchasing Managers' Index rose to 52.5 from 52.4 in December. Analysts had forecast the index at 52.9.
WORLD'S FINANCE CHIEFS MEET
Verbal intervention in recent weeks by various European officials worried that a stronger euro could damage Europe's fragile economic recovery has slowed the dollar's slide. Now with the Florida meeting imminent, one growing view is it is likely to end without agreement on any strong statement aimed at halting the dollar's decline, which has in part been driven by the size of the U.S. current account deficit. International Monetary Fund Managing Director Horst Koehler said on Monday a credible global strategy was needed to avoid pressuring any major currency area. He added that while a strong euro and weaker dollar was facilitating current account rebalancing he shared euro zone officials' sentiment that the situation needed monitoring. Traders said the U.S. authorities appeared in no hurry to warn against the greenback's weakness, as the U.S. economy was benefiting from the cheaper dollar while U.S. shares have rallied recently, unscathed by the dwindling value of the currency. But others said Japan's massive intervention could come under fire, particularly from European countries. At its last meeting, in Dubai, the G7 called for flexible exchange rates, which markets read as criticism of Asian nations for keeping the dollar underpinned to help their own export competitiveness. The September statement from Dubai sent the dollar reeling. More U.S. manufacturing data is due later in the day, with the Institute of Supply Management's index seen rising to 64.0 in January from December's 63.4. "The ISM could generate some impact at the margin. Given that everyone is looking at the U.S. labour market, the employment component will be looked at," said Mellon Bank's Gunner. U.S. President George W. Bush is also due to propose his election-year budget plan on Monday. The $2.4 trillion budget is expected to cut dozens of government programmes and set deficit-reduction goals that many politicians and analysts are sceptical Bush can meet. The release is not expected to have much impact on the markets other than serving as a reminder of the vast U.S. budget deficit which is one of the key drivers of dollar weakness.//