10 May 2006, 10:32  US dollar drifted lower against the yen

The US dollar drifted lower against the yen in early afternoon trading here, but few market participants in Asia were willing to take big positions before the meeting of the US Federal Open Market Committee (FOMC) later today, dealers said. In early Asian trading, the dollar had managed to climb above 111.25 yen on buying by importers and on purchases involving option-plays, but this recovery fizzled out, dealers said. At 1.20 pm (0420 GMT) here, the dollar was at 111.01 yen, down from 111.14 yen in Sydney about 3-1/2 hours earlier. The euro was at 1.2759 usd, up from 1.2755 usd in Sydney. "Many dealers here are cautious, awaiting the FOMC meeting," said Harry Ida, senior currency analyst at Thomson Financial's IFR Forex Watch. While the committee is widely expected to raise the federal funds rate by another 25 basis points to 5.0 pct, investors are expecting the FOMC's post-meeting statement to give a clear indication that its series of increases in interest rates is at an end, or nearly at an end, dealers said. Ida said the market bias remains towards a weaker dollar. "The market is awash in negative news about the greenback. Dealers stepped up speculation that the Bank of Japan would raise overnight rates as early as June, which could narrow the gap in interest rates between the US and Japan," he said. "So many dealers appear to be flexing their muscles in pushing the dollar decisively lower." Dealers also said the yen was underpinned by a report that the central bank will use the word "expansion" instead of "recovery" in its next economic assessment. "Finance Minister [Sadakazu] Tanigaki doesn't look to be keenly interested in propping up the yen orally in the face of pressure from the US administration. This is also yen-positive," Ida said. Analysts also said the market will focus on a foreign exchange report to be released by the US Treasury Department, with all eyes on whether China is singled out as a "currency manipulator".

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