Dollar Drops Again vs. Yen

TOKYO -- The dollar slipped towards a four-month low against the yen and inched nearer a 20-month trough versus the euro on Wednesday on expectations that the U.S. currency's interest rate advantage is set to erode further.

Surprisingly strong U.S. service sector data released in the previous session had helped to put the brakes on a sharp two-week-long sell-off in the dollar.

But amid expectations for rates to climb in the euro zone this week and for the Federal Reserve to trim rates next year, the dollar extended losses of around 3 percent built up against the euro and the yen since late November.

Key also to the low-yielding yen's rise against the dollar was its rebound against other major currencies, after having fallen to eight-year lows against sterling last week and a succession of record troughs versus the euro.

If the yen were to rebound in sync against the likes of the euro and sterling, "that's when there could be a bit of a riot in the market," said Luke Waddington, head of forex trading at Royal Bank of Scotland in Tokyo.

By 0620 GMT, the dollar slipped around 0.2 percent to 114.60 yen closing in on the four-month low of 114.43 yen struck on electronic trading platform EBS in the previous session.

The euro fell to 152.75 yen well off a record high of 154.18 yen hit earlier in the week.

Sterling slipped 0.3 percent to 225.95 yen moving further away from the eight-year high struck around 229 yen on Friday.

Traders said the sterling/yen pair was pressured by Japanese investors repatriating funds from a sizeable amount of gilt bond redemptions this week.

The yen found additional support after Bank of Japan Policy Board member Kiyohiko Nishimura said the central bank can adjust nominal rates carefully and slowly if price-growth expectations are kept low and stable.

Nishimura's remarks followed a speech on Tuesday by BOJ board member Atsushi Mizuno, who said strength in all economic indicators was not necessarily a prerequisite for raising rates.

Investors took the comments as signs Japanese rates would rise 25 basis points to 0.50 percent in the near future, perhaps even as early as this month.

HIGHER RATES

The euro rose to $1.3335 from around $1.3315 in late U.S. trade, in sight of a 20-month high of $1.3370 hit on Monday.

The euro was up from a low of $1.3287 touched on Tuesday after the U.S. Institute for Supply Management's services index rose to 58.9 in November from 57.1 in October, surpassing forecasts for a slide to 56.0.

The figures took some of the sting out of the ISM's manufacturing poll last week showing a contraction in factory output for the first time in 3-½ years.

But the mixed data did little to alter the outlook for a slowing U.S. economy and expectations that the Fed's next move would be to cut rates from the current 5.25 percent.

The euro was supported ahead of a European Central Bank policy meeting on Thursday, when it is expected to lift rates to 3.5 percent and may signal more hikes early next year.

Sterling was at $1.9735 in sight of a 14-year high before a Bank of England policy meeting on Thursday, when the central bank is expected to keep rates at 5 percent.

The median forecast in a Reuters poll of 50 economists showed a 40 percent chance of a quarter-point rise to 5.25 percent in February.

"At the moment it's easier to buy currencies whose rates are expected to rise," said Nobuo Ibaraki, forex manager at Nomura Securities.

Editor's note:
The Six Sectors Poised to Skyrocket as the Dollar Declines - Go Here Now