TOKYO, Feb 5 - The dollar hovered in a tight band against other major currencies on Thursday as investors kept to the sidelines ahead of a Group of Seven meeting. The greenback held just above a recent three-and-a-half-year low on the yen, supported by commercial buying and chances of Japanese intervention, but the market lacked the energy to swallow heavy offers lined up above 105.70-105.80 yen. At 0605 GMT, the dollar stood at 105.51/54 yen , up slightly from late New York's 105.41/49 and above this week's three-and-a-half-year low around 105.20. In the run-up to the meeting of G7 finance ministers and central bankers on Friday and Saturday in Florida the market has been roiled by comments, primarily from European policy-makers, expressing concern over the declining value of the dollar.
This verbal intervention has helped apply the brakes to the dollar's slide. But the apparent nonchalance of the U.S. government, mindful in an election year of the pain a strong dollar exerts on U.S. exporters, has led to rising speculation that the all-important communique at the end of the G7 meeting will not present a united view on the dollar's fall. "The market is in a G7 waiting mode. No clear trend is expected until we confirm the outlook of the meeting," said Shogo Nagaya, forex section manager at Nomura Trust and Banking. "Intervention fears should continue to lend support at 105 yen, but a dip below that level will induce active stop-loss selling," Nagaya said.
The euro was quoted at 132.21/29 yen compared with a late U.S. level of 132.10/24 yen. Traders said Japanese exporters and investors were detected selling the single European currency sporadically, locking in proceeds in euros into yen ahead of book closings at the end of the financial year on March 31. The single currency was steady at $1.2531/35 .
DOLLAR STILL VULNERABLE
Traders said the dollar was still vulnerable to speculative selling versus the yen, with major knockout options orders rumoured to be lined up at 104.75-104.85 yen. "There is still a possibility that the dollar could lose ground, considering option volatility levels remain high," said Kosuke Hanao, head of foreign exchange sales at Royal Bank of Scotland. Implied option volatility in dollar/yen has been standing at multi-month highs. For example, one-month volatility was quoted at 11.00/11.25 percent, its highest since late October. In the shorter end, one-week volatility was around 14 percent, holding near the highs seen since last September shortly after the previous G7 meeting. In the latest survey of currency analysts, the consensus view is for the yen to continue to strengthen despite record amounts of cash spent by Japan to curb its rise. Over the next 12 months, foreign investors' appetite for Japanese stocks, currency inflows from exports and weakness in the dollar will probably push the yen towards the psychologically important level of 100 yen per greenback, a rate not seen since November 1995, analysts said in the monthly currency poll. "The weak trend in the dollar is expected to continue after the G7 meeting because no one expects much from the statement," said Hidehiko Inamura, a director of foreign exchange at Citigroup in Tokyo. "We feel there is a strong possibility that the market is going down below 100 yen in the next two months, but how soon depends on the the statement. If their description does not change, the move is gradual. If the Japanese government feels more pressure to stop intervention, then dollar/yen crumbles," he added. Japan's top financial diplomat, Zembei Mizoguchi, said on Thursday that the U.S. economy remained strong and it was inappropriate for the currency market to focus only on bad points such as the budget and trade deficits. The comments had little impact on the market.
The dollar also showed muted reaction after the Bank of Japan decided to keep its monetary policy unchanged after a two-day Policy Board meeting, an outcome widely expected by markets after a surprise easing just two weeks ago. Separately, in its monthly report for February the central bank stuck to its view that the Japanese economy is in a gradual recovery.//