Hopes of Japanese rate cut boost dollar

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Economics Correspondent

The dollar touched a four-month high against the yen yesterday, as financial markets focused on the prospect of more Japanese interest rate cuts.

Trading on the foreign exchanges was quiet in advance of Fed Chairman Alan Greenspan's congressional testimony on the economy on Wednesday. Even so, the dollar climbed above Y89 for the first time since March because of firm expectations that the Bank of Japan will reduce its official discount rate some time after Sunday's Upper House elections.

A big US hedge fund purchase of dollars was reported to have helped the currency yesterday. Figures on inventory levels in May also underpinned the gains, by reinforcing the doubts in the minds of some analysts about whether the Federal Reserve will follow up this month's small interest rate cut with another in August.

Neil MacKinnon, chief economist at Citibank in London, said: "Investors are not madly bullish about the dollar, but it can certainly gain against the yen." Ron Leven, global currency strategist at JP Morgan, said: "The Japanese are buying." They were also allocating more funds abroad, he said.

Most analysts see further relaxation of monetary policy in Japan as a racing certainty. Saburo Sano, an analyst at New Japan Securities, said: "We expect a discount rate cut of half a point in Japan by mid-August."

However, there are doubts about the immediate prospects for US interest rates. Yesterday the Commerce Department said business inventories rose 0.4 per cent in May, and revised the April increase up to 1 per cent, the 14th successive increase.

This came on the heels of Friday's news of stronger-than-expected retail sales. Although it would be unusual for the Fed not to follow up a quarter- point interest rate reduction with another, the stronger economic figures prompt some Wall Street analysts to believe it will wait until the autumn before moving.

The dollar has retraced nearly half its 1995 losses against the yen, but it has not yet recovered ground against the mark. The Bundesbank did not reduce German interest rates when the Bank of Japan and Fed acted two weeks ago.

Although analysts hold out hopes of a reduction in German rates later in the year, the Bundesbank has started its month-long summer recess.

Thomas Mayer, an economist at Goldman Sachs in Frankfurt, said: "During the next few months signs of benign inflation will allow the doves on the Bundesbank Council to engineer another rate cut."

Better-than-expected factory gate price figures published yesterday will help the case of the doves. Prices charged by producers fell 0.3 per cent in June, taking their year-on-year rate of increase down to 2.0 per cent.