Yen Versus The Euro

The yen fell from a two-week high against the dollar and weakened versus the euro as investors resumed their search for higher yields outside Japan through so- called carry trades.

The dollar fell versus the euro before the Federal Reserve's interest-rate decision as policy makers are forecast to hold U.S. borrowing costs at 5.25 percent. Japan's yen fell against all 16 of the most-active currencies as Bank of Japan Governor Toshihiko Fukui said the central bank aims to adjust interest rates at a gradual pace.

``We have past the worst of the market jitters and are starting to return to the normal pattern of people seeking higher returns in risky assets, and that will weaken the yen,'' said Nicholas Bennenbroek, head of currency research in New York at Wells Fargo & Co. ``The Fed won't change its view on inflation today.''

Japan's currency dropped to 123.04 per dollar at 9:35 a.m. in New York, compared with 122.83 yesterday. The yen also fell to 165.77 against the euro from 165.24. The dollar fell 0.1 percent to $1.3471 versus the euro, from $1.3453.

The U.S. economy grew at an annual pace of 0.7 percent in the first quarter, the Commerce Department in Washington said. The rate compared with a 0.8 percent median forecast based on a survey of 73 economists by Bloomberg News.

Fed's Announcement

The Fed's interest-rate announcement and accompanying statement on the outlook for inflation and growth will be released at 2:15 p.m. Washington time.

A gauge of inflation watched by the Fed was unexpectedly revised up. The central bank's preferred inflation measure, which is tied to consumer spending and strips out food and energy costs, rose at a 2.4 percent annual rate in the first quarter, faster than the 2.2 percent previously estimated.

Fed policy makers, including Chairman Ben S. Bernanke, have said they would be comfortable with the gauge between 1 percent and 2 percent.

Japanese industrial production fell a seasonally adjusted 0.4 percent in May from a month earlier, the Ministry of Economy, Trade and Industry said in Tokyo. The median estimate of economists surveyed by Bloomberg News was for a 0.9 percent increase.

``Worse-than-expected data suggest the economy is in a soft patch,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd. ``The bias is for yen selling.''

The yen fell 1.3 percent to 94.68 versus New Zealand's dollar from 93.47 yesterday, the biggest slide almost three weeks. New Zealand's 8 percent benchmark interest rate compares with Japan's 0.5 percent, the lowest among major economies. Against the Australian dollar, the yen dropped 1.2 percent to 104.21 from 103. Australia's key rate is 6.25 percent.

Investors put on carry trades by borrowing in Japan and investing in countries with higher interest rates.

source:bloomberg.com