NEWS / Foreign Exchange

FOREX-S&P's Japan upgrade boosts yen vs majors

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By Toni Vorobyova

LONDON, May 23 - The yen rose against the dollar and the euro on Tuesday after ratings agency Standard & Poor's revised its rating outlook for Japan to positive from stable, sparking a knee-jerk reaction in an already volatile market.

The S&P announcement hit the market as the dollar struggled to extend gains after hitting a two-week high against the yen on Monday, while investors grew nervous about how long a sell-off in emerging markets and stocks would continue.

"The yen's jump on rating news underscores how volatile the market is and how speculators are leading the trading, taking advantage of a lack of direction and a lack of major news," said Hideki Hayashi, global strategist at Shinko Securities in Tokyo.

By 0720 GMT, the yen was up 0.10 percent on the day against the dollar at 111.38 yen <JPY=>, and almost half a percent stronger against the euro at 142.85 yen <EURJPY=>.

One-month yen volatility <JPY1MO=> hit its highest levels in nearly two years last week, whilst euro volatility <EUR1MO=> rose to an 11-month peak, with currencies increasingly reacting to moves in other markets such as commodities and equities.

BOJ TO HIKE SOON?

The yen was also supported by comments from Bank of Japan Governor Toshihiko Fukui, who was quoted as saying the BOJ will adjust interest rates gradually "so as not to be overly behind the curve".

"The S&P comments and also the Fukui comments during the Asian session, which were quite hawkish ... these two elements are bullish for the Japanese currency," said Carole Laulhere, currency strategist at Societe Generale in Paris.

Fukui's remarks are "one more (signal) that the Bank of Japan is about to hike its rates. We can expect the first move at the July or August BOJ meeting," she added.

The euro was a touch weaker against the dollar at $1.2854, with key resistance seen at the $1.2900 level <EUR=>. If that is breached, the single currency could move back up towards last week's one-year highs around $1.2971, said Nicole Elliott, technical strategist at Mizuho Corporate Bank in London.

French consumer spending came in stronger than expected in April, but business confidence was a touch below forecasts in May.

Other data due on Tuesday include euro zone industrial orders for March at 0900 GMT and the Belgian leading indicator for May -- seen as a good barometer for the 12-nation bloc as a whole -- at 1300 GMT.

The data might "provide some fine tuning to ECB rate hike expectations, probably reinforcing expectations of a 25-basis-point hike over a 50-basis-point one (in June)," DrKW said in a note to clients.

ECB President Jean-Claude Trichet on Monday reinforced expectations of steady policy tightening in the euro zone by saying the central bank was very vigilant on inflation.

BERNANKE TESTIMONY

In the United States, Federal Reserve Chairman Ben Bernanke is due to testify before the Senate Banking Committee later in the day, although the subject -- financial literacy -- is not directly related to the economic outlook.

Investors are looking for clues on whether the Fed will hike rates from the current 5 percent in June or whether it will decide to pause in its two-year old monetary tightening cycle.

The dollar rose 15 percent against the yen and the euro last year thanks to a succession of U.S. interest rate hikes.

But worries about a narrowing yield advantage along with a growing conviction that U.S. officials want a weaker dollar to help reduce the country's gaping deficits have conspired to drive the dollar to one-year lows against the euro and pound this year.