The yen surged to one-month highs against the dollar and euro on Wednesday as an upward revision to Japanese January-March economic growth confirmed the view the world's second largest economy was recovering strongly. Japan's economy grew by 1.5 percent in real terms from the previous three months, up from a preliminary estimate of 1.4 percent. This marked the eighth consecutive quarter of expansion and the best run since 1995-1997. It also translated into an annualised growth rate of 6.1 percent, which outstripped the 4.4 percent logged in the United States in the same period and sent the yen more than one percent higher against the euro and nearly as much versus the dollar.
"The yen's strength is a reflection of the growing optimism on the state of the Japanese economy," said Adam Cole, senior currency strategist at Royal Bank of Canada Capital Markets. "Basically we are seeing overseas investors continue to buy the Japanese recovery story." By 0940 GMT the yen traded 3/4 of a percent higher versus the dollar near the day's high of 108.67 . It also traded one percent higher versus the euro at 133.12 , slightly off the day's peak of 132.73.
RISING YIELDS
Rising bond yields and falling oil prices both proved yen positive, with 10-year Japanese government bond yields hitting a 3-1/2 year high and U.S. light crude at its lowest level in more than five weeks. "GDP data was higher and the risk is clearly for yen strength," said Steven Saywell, senior currency strategist at Citibank. "Higher oil prices are particularly bad for the yen but oil is falling. Ten-year (U.S.-Japan) bond spreads are narrowing and the yen is rising, so there is no strong incentive for Japanese investors to go abroad." Meanwhile the dollar found support against other currencies after U.S. Federal Reserve Chairman Alan Greenspan said on Tuesday that the central bank would do "what is required" to keep inflation in check.
The dollar stood a quarter percent higher on the day at $1.2225 , having rallied late on Tuesday from a two-month low of $1.2351. Some investors interpreted Greenspan's comments as a sign the Fed could move more aggressively than first thought to raise rates, which could help entice more foreign investors to dollar-denominated bonds. The Fed has held overnight rates at a 46-year low of one percent since last June, but it is widely expected to raise them by a quarter percentage point when it meets on June 29-30. "Greenspan obviously took another slight step towards the first actual rise in interest rates in a relatively hawkish tone to his comments," Cole said. But uncertainty over how quickly the Fed would tighten rates again after that meeting meant that many traders were eager to see U.S. producer price data due on Thursday. The Bank of England kicks off a two-day policy meeting on Wednesday. Analysts are divided over whether the bank will opt to raise interest rates by 25 basis points for the second month in a row from the current level of 4.25 percent.////