LONDON, Aug 24 - The euro slipped a third of a percent against the yen on Friday as demand for yen from Japanese corporates overshadowed further evidence of slowing price pressures in the euro zone.
The euro's losses against the yen also knocked it down a quarter percent against the dollar, taking the shine of its rally to five-month peaks earlier this week.
Dealers said Japanese corporates were repatriating profits from overseas assets to bolster balance sheets ahead of the end-September book-closing. Such activity also saw the yen strengthen to within half a percent of recent 2-1/2 highs against the dollar.
"The yen is being supported by repatriation flows and Japanese companies becoming more active in hedging their foreign currency exposure," said Derek Halpenny, currency economist at Bank of Tokyo Mitsubishi. "For now, fundamentals in Japan are being ignored."
The euro was trading at $0.9230 at 0752 GMT, down just over a cent from five-month highs scaled earlier this week. It stood at 109.36 yen , down a third of a percent from the New York close.
The dollar slipped to lows around 119.60 yen , within sight of lows scaled last week just above 119, before recovering to around 119.80.
EURO ZONE RATES IN FOCUS
Speculation the European Central Bank will cut interest rates as early as next week was stoked by data showing German producer and import price inflation both fell more than expected in July.
France's inflation rate also fell 0.2 percent month-on-month in July, confirming the picture of slowing price pressures across the euro zone.
The ECB has so far been reluctant to loosen monetary policy because of relatively high European inflation and has only cut rates once this year, in sharp contrast to the Federal Reserve which has cut seven times.
"The German price data confirms the improving inflation background and consolidates our view that the ECB could pull the trigger next week," said Nick Stamenkovic, senior strategist at Nomura International.
"A firmer euro also provides room to cut rates, and such a move could lift the euro further."
In a survey conducted by this week, 41 out of 55 economists predicted the ECB would cut interest rates by a quarter point to 4.25 percent at its meeting next week.
Some traders cautioned, however, that euro zone money supply data, due out next week, may continue to show above-target growth, even though a rise could be partly due to temporary factors.
YEN SUPPORTED
Some traders said upbeat comments from Cisco Systems Inc.'s the previous day may be providing some support for the yen.
U.S. network equipment firm Cisco said on Thursday it saw signs its business was stabilising, helping buoy technology stocks. Japanese stock prices, which tend to track the Nasdaq, were lifted by the news, and this in turn was helping the yen, dealers said.
Japan's Nikkei share average <.N225> ended up 0.35 percent on Friday, clawing back from 17-year lows set earlier this week.
Dealers said the yen was continuing to draw support from the previous day's comments by Japan's Prime Minister Junichiro Koizumi, who said it would be difficult to use an inflation target in Japan.
Japan's top financial diplomat, Haruhiko Kuroda, repeated that foreign exchange rates did not currently reflect economic fundamentals, but his comments had little lasting impact.