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Dollar Gains As Prospects Dim for G7 Action on Yen Weakness

Reuters
Wednesday, 7 Feb 2007 | 11:22 AM ET

The yen continued to weaken against the dollar and euro amid expectations Group of Seven finance officials will not take a tough stance on the Japanese currency's broad weakness at this weekend's meeting.

That view was bolstered after a senior official at Japan's Finance Ministry said the yen could be discussed at the G7 gathering in Essen, Germany, but that it was unlikely to be the main subject of the talks.

That followed U.S. Treasury Secretary Henry Paulson saying on Tuesday the yen's value was set by market fundamentals, suggesting Washington does not have a problem with the weak currency.

"Everybody is going against the yen on the assumption that the G7 meeting would be a nonevent," said Boris Schlossberg, senior currency strategist at DailyFX.com in New York.

"The general sentiment is that there would be no punitive language directed toward the yen's weakness. That created some flow of funds back into euro/yen and drove euro/dollar all the
way to $1.30 earlier," he added.

Comments by Paulson and the Japanese finance official were in stark contrast to those of German Deputy Finance Minister Thomas Mirow, who said today that a discussion of foreign exchange rates will play a key role at the G7 and that the yen is "an important currency." The G7 meeting will be held on Feb. 9-10.

Mirow's remarks added a tinge of uncertainty in the market, prompting some traders not to rule out buying the yen again later in the session. European officials, in general, have been unhappy about the yen's weakness because it makes their exports more expensive in Japan.

With the markets focused on the yen, Wednesday's economic data on U.S. business productivity for the fourth quarter had little impact. Non-farm productivity rose at a much stronger-than-expected 3.0 percent annual pace, but the dollar hardly budged.

"The stronger than expected productivity growth is actually a dollar-negative from the inflation side of the equation," said Brian Dolan, director of FX research at Forex.com in Bedminister, New Jersey.

"Higher productivity offsets the higher wage costs, reducing the inflationary potential coming out of wages," he added.

Aside from the G7 meeting, markets are also awaiting rate decisions from the Bank of England and European Central Bank Thursday.

The BoE's Monetary Policy Committee is widely expected to leave rates on hold at 5.25% on Thursday. But following its surprise rate increase last month, traders are not entirely dismissing the MPC's ability to surprise again.

The ECB is also expected to keep interest rates on hold at 3.5% and traders are awaiting post-meeting comments from ECB President Jean-Claude Trichet for clues on where euro zone rates are headed.

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