The euro steadied against the dollar on Thursday as investors waited to see if OPEC could take the steam out of oil prices, while the yen slid across the board after sharp losses in Japan's stock market. The yen fell as much as one percent against the dollar and the euro after the Nikkei average <.N225> fell 1.91 percent, recording its biggest one-day percentage loss in two weeks.
Dealers blamed the fall in Japanese stocks on a resurgence of oil prices and reports that China may raise interest rates, both of which could dampen global growth and jeopardise Japan's export-led recovery. "Equity market losses are weighing on the yen after the Nikkei's sharp fall," said Kamal Sharma, currency strategist at Dresdner Kleinwort Wasserstein. "Investors are worried what impact higher oil prices and a possible tightening in Chinese policy will have on Japanese exporters." OPEC ministers are meeting in Beirut to discuss raising production quotas to quell an oil rally that has propelled prices to their highest since the early 1980s. High oil prices have been a drag on growth-sensitive currencies such as the yen and dollar as well as commodity-based units like the Australian dollar. The yen was nursing losses of one percent at 111.04 per dollar and 135.65 per euro in mid-morning European trade, at session lows.
CENTRAL BANK WATCH
The euro steered a steady course around $1.2215 ahead of a meeting of European Central Bank policymakers later in the session and key U.S. jobs data on Friday. The ECB's Governing Council is expected to leave borrowing costs at two percent for the 12 straight month while keeping its options open to assess the impact of oil costs on inflation and economic growth. The bank will announce its decision at 1145 GMT and its president, Jean-Claude Trichet, will hold a news conference at 1230 GMT. The euro rose above $1.23 for the first time in two months on Wednesday but eased from its peaks in New York trade as U.S. oil prices came off their peaks and gave the dollar a reprieve. The United States is the world's biggest oil consumer and soaring oil prices have pushed the dollar lower against European currencies as markets have fretted about the fallout on U.S. growth and interest rates. Oil prices picked up again on Thursday after Iran voiced concern over plans for large output increase but held below 21-year peaks scaled earlier this week.
ALL EYES ON OPEC
OPEC ministers will discuss raising official output limits between 2-2.5 million barrels per day. Iran suggested an increase of 1.5 million barrels. "High oil prices automatically pressure the dollar against European currencies, but it can also be seen as negative for the yen because Japan imports most of its oil," said Hideaki Furumaya, a forex manager at Trust and Custody Services Bank. While investors have been concerned about the impact of high oil prices on global growth, data out of both Japan and Europe provided grounds for optimism. Capital spending by Japanese companies reached its highest in seven years in the January-March quarter, suggesting Japan's economy may have grown faster in the period than originally estimated. Business activity in the euro zone's dominant service sector quickened in May as promotions and stronger consumer demand helped companies win new business. The Eurozone Business Activity Index, which covers over 2,000 services companies, rose to 55.8 in May from 54.5 the previous month, beating the consensus forecast of 54.6.///