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Yen Falls to 5-Week Lows on Oil Worries September 23, 2004 LONDON (Reuters) - The yen fell to five-week lows against the euro and the dollar on Thursday as steep oil prices weighed on Asian stock markets and dragged the region's currencies lower. U.S. oil futures remained within $2 of last month's record highs, after leaping to a one-month peak of $48.64 a barrel on Wednesday when the U.S. government reported a big decline in stockpiles. Japan imports all of its oil and Asia, overall, is heavily dependent on imported energy. "Oil prices are again on the minds of analysts and at such moments the yen tends to come in a negative spotlight," said Ian Gunner, head of foreign exchange research at Mellon Bank in London. Weakness in the Japanese currency was broad-based as the euro pushed up to 136.50 yen and the dollar rose to 110.92 yen by 5:45 a.m. EDT. Markets in Tokyo, Asia's major financial center, were closed for a public holiday on Thursday, the second one this week. But bourses in South Korea, Taiwan, Singapore and Hong Kong recorded sizeable losses. European stock markets also opened lower following losses of 1.33 percent in the blue-chip Dow Jones industrial average on Wednesday. BACK AND FORTH The euro gained some ground against the dollar, jumping above $1.23 in see-saw trade following Tuesday's Federal Reserve interest rate rise and its cautious comments on inflation. Many traders sold the dollar aggressively after the Fed's move, believing that borrowing costs in the United States would rise more slowly in the coming months. A Reuters poll this week shows Wall Street analysts still expect the U.S. central bank to raise rates at its next meeting in November but many are less sure about a further hike in December. On Wednesday, the dollar recovered much of the ground lost in the aftermath of the Fed's decision but it began to lose its poise again on Thursday. "The market is having another try to push euro higher after it failed yesterday, but there is nothing dramatic going on," said Mellon's Gunner. "Ultimately, people are still uncertain about the U.S. economy and until that clears one way or another it is difficult to lay big bets on." Many traders were also looking at developments in the oil market as analysts warn the U.S. currency could suffer if the U.S. economy weakens on the back of costly fuel. This explained the yen's deeper fall against the euro than the dollar as the single currency is seen as a better defensive play in an environment of high oil prices. "Staying short of yen makes sense as oil prices are still high and recent price correlations suggest the yen should be lower than it is now," said Shahab Jalinoos, senior currency strategist at ABN AMRO in London. FLOWS IN SPOTLIGHT Foreign investment flows into the United States were also in the spotlight. One worry for dollar bulls is that the U.S. economy could fail to attract enough capital to plug its current account deficit. These concerns plagued the dollar last year and helped push it to record lows versus the euro in February. The United Nations said in its annual World Investment Report late on Wednesday that cross-border investment was set to bounce in 2004 after three years of deep declines. Livelier cross-borders flows are exactly what the U.S. needs to fight off its external shortfall. But analysts said there was little evidence of enough money directed at the United States specifically. "The direction of these flows has been negative for the dollar and the foreign direct investment outflow from the U.S. was bigger in the first half of this year than last," said Gunner.
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