22 May 2006, 12:01  US dollar higher in Tokyo on commodities slump

The US dollar firmed further in early afternoon trade here, supported by the sharp slump in commodities last Friday as well as expectations that the US Federal Reserve is not yet done with its cycle of interest rate hikes, dealers said. "Thanks to the renewed (positive global) sentiment towards the dollar, some funds have begun building up long positions in the unit again," Sumitomo Trust and Banking forex dealer Norihiro Takemura said. The favorable view of the greenback against the yen was also aided by comments from Bank of Japan Governor Toshihiko Fukui last Friday after he again dampened speculation of the possibility of a near term hike in the bank's overnight call rate and a quick end to the BoJ's zero interest rate policy.
"Since (previous) fears of a narrowing interest rate differential (between US and Japanese rates) has faded for now, the dollar may move back up towards the 113 yen level, although selling (of the dollar) by Japanese exporters is likely above the 112 yen mark," Takemura said.
At 12.30 pm (0330 GMT) here, the dollar was at 111.95 yen, compared to 111.84 yen in early Sydney trade and 111.66 yen in New York late Friday. The euro was at 1.2741 usd, from 1.2763 usd in Sydney and 1.2767 usd in New York.
The euro fell back as the market priced in renewed expectations for a further US rate hike in the US after April core consumer prices surprised on the upside. The single currency was also hurt by comments from European Central Bank officials to talk down the value of the unit.
French Finance Minister Thierry Breton said last week that European officials will do "everything" to prevent the euro from rising too much against the dollar, fearing the adverse impact of the unit's appreciation on exports.
"While we believe that the euro is still in a rising trend from a longer term perspective, the single currency will be exposed to some downside risk in the very near term due to this improved sentiment towards the dollar," Takemura said.
"In the process of this correction, the euro may be sold down as far as the to 1.26 usd level," he said. Dealers noted that this Friday's release of the US core PCE deflator for April may provide a cue for the strength of the dollar's rebound in the near-term.

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