26 June 2006, 12:26  The dollar was holding near two-month highs against the yen and the euro

The dollar was holding near two-month highs against the yen and the euro on Monday on growing expectations that the Federal Reserve will increase interest rates again in August after an anticipated rise this week. The market is keenly awaiting the Fed's statement at the end of a two-day policy meeting on Thursday for clues about whether it will keep raising rates to stave off inflation. "The statement will show their thinking about the possibility for an additional rate hike in August," said Kikuko Takeda, currency strategist at Bank of Tokyo-Mitsubishi UFJ. "I don't expect much change in the nuance of the statement." At the end of the May meeting at which the central bank hiked rates for the 16th straight time, the Fed was more hawkish than markets had expected in its statement, saying "some further policy firming may yet be needed to address inflation risks" The dollar may also rise against the yen in the near term now that it has closed a price gap that appeared on technical charts after a meeting of the Group of Seven industrial powers in late April. "I wouldn't be surprised, if say in the upcoming days, we do see dollar/yen grind a bit higher," said Jan Lambregts, head of Asia-Pacific Research at Rabobank in Singapore, adding that the next technical target is a return to the year's high of 119.40 yen marked in February. After the dollar fell for most of the year partly on expectations that the Fed was close to pausing its two-year run of raising rates, the currency has rallied this month on signs that its rate advantage will widen after this week's meeting. By 0540 GMT, the dollar edged down to 116.40 yen . It closed the post-G7 chart gap on Friday with its rise to a two-month high of 116.60 yen on electronic trading platform EBS. The euro inched up to $1.2515 but was in sight of the 2-month low of $1.2478. It eased slightly to 145.65 yen . FUKUI GRIEF The Japanese currency remained under pressure from uncertainty about the fate of Bank of Japan Governor Toshihiko Fukui, embroiled in a scandal over his private investments. "We are a bit worried about Fukui," said the chief trader at a European investment bank in Tokyo. "It's getting bigger than expected." A public opinion poll by Fuji Television conducted at the end of last week showed more than 70 percent thought Fukui should quit over his investment in a fund run by high-profile financier Yoshiaki Murakami, who was indicted on Friday for insider trading. The government has strongly backed Fukui, with Economics Minister Kaoru Yosano jumping to his defence on Sunday, a day after four opposition parties called on him to resign. Speaking on a television programme, Yosano said that public outrage calling for Fukui's resignation was warranted, but the impact of such action on unstable global markets had to be taken into account. Some say that if Fukui were to step down, that might delay the timing of the BOJ's first rate rise in six years, forecast for as early as July. Others weren't convinced. "It's pretty much independent of what happens in the Murakami scandal with Mr. Fukui," said Rabobank's Lambregts. "We feel that even if there is a new BOJ governor, it's unlikely that the BOJ will back down on an interest rate hike." Expectations for a BOJ rate rise in July might get a boost from a couple of key indicators due this week and next, said Tohru Sasaki, chief forex strategist at JPMorgan Chase Bank in Tokyo. "If the CPI and tankan are strong enough, then the probability of a rate hike on July 14 will be very high," he said.

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