The yen followed the fortunes of Japanese stocks and rose on Tuesday, but trade was otherwise uninspired as the market awaited testimony by the U.S. Federal Reserve chief for any hints about a rise in interest rates. Markets have been abuzz with speculation the Fed could raise rates soon in the wake of strong jobs and inflation data, but weaker-than-expected consumer confidence and industrial output reports last week dampened that talk. Fed Chairman Alan Greenspan is due to testify before the Senate Banking Committee at 1830 GMT. He is also slated to appear before the Joint Economic Committee on Wednesday.
"If he says that U.S. rates are going to be unchanged or kept low for a considerable period again, I think the dollar is going to collapse," said a trader at a foreign brokerage. He added that he did not think Greenspan would say that, but even if the Fed chief simply said nothing about the likely timetable for raising rates, the U.S. currency could fall back. "I think that would put some pressure on the dollar," the trader said. Speculation on a rate rise has helped to support the dollar, which has risen around 4.5 percent against the yen and 3.5 percent versus the euro since the beginning of the month.
At 0545 GMT, the dollar was trading around 108.20 yen , down from its late New York level of 108.45 yen. Traders said the yen got a boost from foreign funds returning to Japanese stocks after a bout of profit-taking. "The Nikkei seems to be at a reasonable level and maybe seems a little cheap compared with other stocks. I think they (funds) might buy back stocks for their portfolios," said Hidehiko Inamura, a director of forex at Citigroup in Tokyo. Foreign investors have persisted in pouring money into Japanese stocks on recent healthy data on the world's second-largest economy. Tokyo's Nikkei stock average <.N225> ended Tuesday trade up 1.6 percent at 11,952.26. Taking its cue from a weaker dollar/yen, the euro was at 129.30 yen , down about a yen from late U.S. trade. The dollar was around $1.1950 per euro , up from $1.2008 in late New York trade.
TOO HASTY
Some analysts said that, despite signs of a recovery in the U.S. economy, the market had overreacted to recent figures and a rate rise remained some way off. "The market jumped on the data too hastily, although the jobs data was better than expected, which definitely is a sign of recovery," said Hideaki Furumaya, currency manager at Trust and Custody Services Bank. "There are other elements to consider, and the dollar is going to be in a tug-of-war between economic recovery and geopolitical risk." An improvement in employment is seen as a crucial factor in any Fed decision to raise its funds rate from a 46-year low of one percent. The market was also looking ahead to a meeting of Group of Seven finance ministers and central bankers in Washington on Friday and Saturday. Japanese Finance Minister Sadakazu Tanigaki said on Tuesday that they would probably discuss foreign exchange, but it would not be the only topic. Japan is expected to come under less pressure than at recent G7 talks since it has apparently cut back on intervening in the currency market as the dollar has recovered.
"The focus of the dollar's direction has moved away from Japanese intervention to U.S. interest rates," said Furumaya of Trust and Custody Services Bank. Bank of Japan Governor Toshihiko Fukui said on Tuesday that it was too early to consider ending the central bank's super-loose monetary policy, which has pinned interest rates near zero percent.///