DJ Forex View: Strong Dlr Unlikely As BOJ Looks Set To Hike
But regardless of what happens the market will rally on the news
NEW YORK (Dow Jones)--The dollar will likely descend from the high end of its recent ranges against the euro and yen this week, with the Bank of Japan monetary policy meeting Monday providing most of the direction for the near term.
While market sentiment has shifted back and forth over whether Japan's central bank will finally abandon its near-zero interest rate policy, most signs seem to point in the direction of a rate hike.
Bank of Japan Governor Masaru Hayami has repeatedly indicated his intention to raise interest rates as soon as possible, and Economic Planning Agency chief Taichi Sakaiya said last week that lifting short-term interest rates to levels slightly above zero wouldn't have much effect on the macro economy.
"I think Sakaiya made the indication that rates would be moved. He seemed to have stepped aside in opposition," said David Durrant, chief currency strategist at Bank Julius Baer in New York.
While Durrant said a knee-jerk reaction may send the dollar down to around Y105, he also noted that a rate hike wouldn't be a significant enough change in policy to break the currency pair out of its recent Y104-Y108 range.
"Unless it has a fairly significant impact on the price of assets, I think a rate hike will be currency neutral," he said. "I don't believe a move in the short end will really change JGBs (Japanese government bonds)."
Also, investors are wary about what effect raising interest rates will have on the struggling Japanese economy, and that could weigh on the yen.
"It's kind of a mixed basket whether or not this is a good thing," said Tod Van Name, foreign exchange manager at Fuji Bank in New York. "I don't think we'll see a tremendous reversal in dollar strength because the market will step back and say, `What does this mean for the economy?"'
In fact, the recent announcement that department store operator Sogo Co. had filed for bankruptcy protection and continued weakness in Japanese domestic demand may convince the BOJ to hold off on a rate hike for now, said Susan Stearns, director of foreign exchange at Bank of Montreal in New York.
She sees dollar/yen going higher if no action is taken, but added that a rate hike could bring it back down around Y106.
Late Friday in New York, the dollar was buying Y107.86, down from its intraday high of Y108.43 and Y108.25 late Thursday.
The euro was at $0.9365, up from its low of $0.9319 earlier Friday but down slightly from $0.9373 the day before.
The euro slid almost two cents last week despite mostly good news out of the euro zone, pushed down in part by further confirmation of a soft landing scenario in the U.S.
With little data due out of the euro zone this week, much of the focus for euro/dollar will be on Tuesday's U.S. consumer price index for June and congressional testimony by Fed Chairman Alan Greenspan on Thursday.
However, a surprising 0.1% decline in U.S. producer prices Friday added weight to the belief that economic growth is slowing and took some emphasis off of the consumer price data.
"The PPI showed us that things aren't flowing through onto the core rate," said Durrant. "Until that comes through and hits, we can look at all the pressures in the pipeline, but it's being dispersed in other ways."
Analysts predict that euro/dollar will stay rangebound this week and until the Fed meets again Aug. 22.
"The euro may have found a bottom after the PPI number," said Patrick Brodie, vice president of foreign exchange at Sumitomo Bank in New York. But he said any gain in the euro this week will likely stay within the broad range of 92-96 cents that it has been trading in for weeks.
However, Bank of Montreal's Stearns warned that a failure to break above 95 cents could indicate further weakness for the euro.
The other potential focus for the market comes at the end of the week, when the heads of state of the Group of Seven leading industrial nations meet in Japan.
However, analysts don't expect much action to come out of the weekend, with the major global economies moving more in the direction of convergence, and euro weakness and yen strength moderating.
"They'll probably pat each other on the back," Durrant said of the G7 leaders. "They're sort of happy with the world right now, so I don't expect them to make a statement that will rock the markets."
-By Tom Barkley, Dow Jones Newswires; 201-938-4385; tom.barkley@dowjones.com |
