By Satomi Noguchi
TOKYO, April 28 (Reuters) - The dollar climbed to a two-month
high against the yen on Monday, boosted by the growing view that
the Federal Reserve may stop cutting interest rates.
The yen was hurt as Tokyo shares climbed to two-month highs,
further supporting the view that the worst of the credit crisis
is over.
A slight recovery in investor confidence encouraged traders
to move back into risky carry trades, in which the low-yielding
yen is used to fund investments in higher-yielding currencies and
assets.
But activity in Tokyo remained slow as many local investors
stayed away from the market before Japan's Golden Week string of
national holidays that starts on Tuesday.
The dollar held near a three-week high against the euro ahead
of the Fed's two-day policy meeting that ends on Wednesday, when
the U.S. central bank is expected to cut its key rate by 25 basis
points to 2 percent.
The dollar could extend its broad recovery if the Fed signals
in its post-meeting statement that rate cuts will be put on hold
in the face of mounting global energy and food inflation
pressure, traders said.
U.S. short-term interest rate futures even show a small
chance the Fed will keep rates on hold at this week's meeting
<FEDWATCH>.
"All eyes are on the results of the Fed meeting this week,"
said Hideaki Inoue, chief manager of Mitsubishi UFJ Trust Bank.
"The dollar could rise further against the yen if there are
expectations the Fed will hold rates in June and if U.S. bond
yields go up after the meeting."
The dollar was up 0.2 percent at 104.65 yen <JPY=> after
hitting a two-month high of 104.83 yen on electronic trading
platform on EBS.
Option-related selling capped the dollar's gains, but the
U.S. currency could test the psychologically important 105 yen
later in the session as activity picks up in European markets,
traders say.
"The yen looks bearish in an environment with solid gains in
stocks, falling volatility in the market and improved credit
conditions," said Koji Fukaya, senior currency strategist at
Deutsche Securities.
The euro rose 0.3 percent versus the yen to 163.70 yen
<EURJPY=R>, nearer the four-month high just below 165 yen hit
last week, as the Nikkei share average <> climbed to a
two-month high led by gains in financial stocks.
The U.S. central bank has slashed borrowing costs by 3
percentage points since September in response to a credit crisis
that erupted last year.
The euro edged up to $1.5640 <EUR=>, pulled up by its gains
against the yen, and rebounded from an earlier low of $1.5593 on
EBS, near the three-week low of $1.5555 struck on Friday.
The euro had fallen sharply from a record high above $1.60
hit last week as investors pared bets that the European Central
Bank's next move will be to hike benchmark interest rates.
U.S. economic data last week showing resilience in some
sectors such as the labour market contrasted with a sharp drop in
business sentiment in Germany.
That news, combined with ECB policymakers' comments
highlighting worries about excessive volatility in the currency
market had dampened expectations for a rate hike in the euro zone
and hurt the euro.
(Editing by Hugh Lawson)
