25 November 2005, 14:56  The dollar edged toward recent 2-year peaks against the yen on Friday

The dollar edged toward recent 2-year peaks against the yen on Friday and rose versus the euro on the U.S. interest rate advantage over Japan and the euro zone. The U.S. Federal Reserve's campaign of credit tightening, with expectations for further increases, has helped drive the dollar up more than 15 percent against the euro and yen this year. The yen was also knocked against the dollar in thin post-Thanksgiving trade as mixed Japanese inflation data cemented expectations that rates in Japan won't rise soon. "The interest rate differential story is certainly one of the things to take the dollar higher -- but that to a large extent is priced in," Barclays Capital foreign exchange strategist Adarsh Sinha said. "In terms of how much further support that might provide going forward, it might not be as much as it was before," he said, adding that a key influence on dollar/yen was Japanese buying of higher-yielding overseas bonds. Capital flows data from the Finance Ministry on Friday showed that Japanese investors were net buyers of foreign bonds for a ninth straight week last week, buying 223.3 billion yen. The dollar was up a third of a percent on the day by 1052 GMT at 119.36 yen (JPY=), within sight of a recent two-year high at 119.56. The euro was trading at $1.1752 (EUR=), in the middle of recent ranges. The Swiss franc rallied by more than 20 ticks against the euro and dollar (CHF=) after stronger-than-expected Swiss data. The Swedish crown hit one-month highs against the euro (EURSEK=) after Swedish central bank deputy governor Villy Bergstrom said tighter monetary policy was required, and that prolonged crown weakness could impact inflation. The Federal Reserve is expected to raise rates next month to 4.25 percent from the current 4 percent, while the European Central Bank is seen increasing its refi rate by 25 basis points to 2.25 percent next Thursday. But minutes of the Fed's latest meeting released this week have cast doubt on the likelihood of further aggressive U.S. rate rises, allowing the euro to claw back ground from recent two-year lows. ECB Executive Board member Lorenzo Bini Smaghi said in a letter published on Friday that recent comments on euro zone interest rates by European Central Bank policymakers have brought inflation expectations to modest levels.

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