Forex Current News

Forex - Dollar off lows vs yen in Tokyo but downside risk remains
TOKYO, Nov. 11, 2007 (Thomson Financial delivered by Newstex) -- The dollar came off its worst levels against the yen in early afternoon trade as short-term traders locked in gains, but the dollar is expected to remain weak on growing concerns about the subprime mortgage crisis.

The dollar fell to as low as 110.22 yen in early Tokyo trade, a level not seen since May 17 2006, while the euro touched 161.76 yen, nearly 4 yen lower than last week.

At 12.00 am (300 GMT), the dollar was trading at 110.43 yen compared to 110.46 yen in early Sydney trade.

The euro stood at 1.4652 dollars, compared to 1.4649 dollars in early Sydney trade.

Bank of America Corp (NYSE:BAC) , JP Morgan Chase & Co and Wachovia Corp (NYSE:WB) on Friday said the credit crisis will cause another round of heavy losses in the fourth quarter, triggering sharp declines on Wall Street.

'As the market's anxiety about the credit crisis is getting stronger, it now seems to be a matter of time before the dollar falls to below the 110 yen level,' said Osamu Takashima, chief strategist at Bank of Tokyo Mitsubishi UFJ.

The dollar has so far seen relatively firm support against the Japanese currency, in comparison to such currencies as the Australian dollar, euro and the Canadian dollar, due to the yen-funded carry trade. But the unwinding of those positions speeded up its decline against the yen since late last week, according to Takashima.

In the yen-carry trade, investors raise funds in cheap currencies like the yen, and re-invest them into high-yielding currencies such as the Australian dollar for higher returns.

'By late 2008, the dollar may extend its decline towards the 105 yen level,' Takashima said.

The market is closely watching the Bank of Japan which kicked off a two-day policy meeting at noon. Investors are keen to see whether policymakers will show strong resolve in normalizing ultra-low interest rates, which have held at 0.5 percent since February.

But economists expect the BoJ to leave the short-term money market rate unchanged.

Some analysts see limited downside risk for the dollar.

The dollar selling by US hedge funds settling accounts is likely to peak by the end of next week, said Daisuke Uno, strategist at Sumitomo Mitsui Banking Corp.

Once that happens, and once the financial markets begin to realise there is downside risk for emerging markets and Japan in the weakness of the US economy, the pace of selling of the dollar may slow, he said.

'So I believe that the dollar's fall to below 110 yen, if it happens, will be short-lived,' he said.