By Chikako Mogi
TOKYO, April 8 (Reuters) - The euro rallied to a three-month
high against the yen on Tuesday as Japanese investors bought
higher-yielding foreign assets at the start of a new financial
year.
The euro also rose against the dollar on prospects for steady
euro zone interest rates. The outlook contrasts with market
expectations for the Federal Reserve to lower interest rates
further this month.
Traders said Japanese investors appear to have been
allocating funds for fiscal 2008/09, which began on April 1,
although not in huge amounts, and such flows were likely to lead
to yen selling against higher-yielding currencies.
"The market moves reflect a strong appetite among Japanese
investors for foreign assets at the start of the business year,
which is compounded by diverging paths of monetary policy between
the Fed and the ECB, which lend support to the euro," said Hideki
Amikura, a forex manager at Nomura Trust and Banking.
The euro hit a three-month high of 161.75 yen <EURJPY=R> on
electronic trading platform EBS, before slipping to 161.13 yen,
up 0.3 percent from late U.S. trading on Monday.
The single European currency also jumped more than one cent
from the day's lows to as high as $1.5799 <EUR=>. It later
trimmed some of its gains to stand at $1.5751 for a rise of 0.3
percent.
The euro's gains picked up steam after triggering stop-loss
bids at levels above $1.5730, but its failure to break above
$1.5800 later prompted some long liquidation, traders said.
The rise in the euro pushed the dollar lower against the yen
to 102.27 yen <JPY=>, down about 0.2 percent from late New York.
The Federal Reserve is expected to cut interest rates at its
meeting on April 29-30, after slashing its benchmark overnight
lending rate by 3 percentage points to 2.25 percent since
mid-September, wiping out the dollar's yield advantage against
the euro.
The European Central Bank is widely expected to leave its key
rate on hold at 4 percent on Thursday, while the Bank of England,
which also meets on Thursday, is seen cutting rates a quarter
percentage point to 5 percent.
The Bank of Japan started a two-day policy meeting on
Tuesday. Many in the markets expect it to keep interest rates at
the current 0.5 percent this year.
BUOYANT EURO
Concerns expressed by European officials about strong euro
zone inflation pressures dampened expectations for the ECB to
lower rates this year, lending support to the euro, traders said.
But at the same time, traders said major currencies were
unlikely to break out of recent ranges as players cautiously
await Friday's meeting of Group of Seven finance ministers and
central bankers.
"Wariness that the G7 could express discomfort over the
euro's strength is making it difficult to buy the euro before the
weekend meeting. Players are reluctant to sell the euro given
that interest rates aren't heading lower anytime soon," said a
dealer at a big Japanese bank.
Despite signs of stability returning to financial markets,
last week's jobs data deepened worries about a U.S. recession,
boding ill for the dollar.
"The dollar is weak overall and this is not disorderly given
U.S. fundamentals. With the prospect of further declines in U.S.
interest rates, it makes sense that few want to buy the dollar
right now," the dealer at the European bank said.
Later on Tuesday the Fed will release minutes of its March 18
policy meeting that could offer clues on how far policymakers are
prepared to cut the benchmark rate, analysts said.
The G7 is expected to discuss a broad range of proposals
aimed at restoring confidence in the battered banking system.
(Additional reporting by Masayuki Kitano)
