Euro reaches all-time high against Japanese yen

LONDON (AFX) - The euro forged ahead to reach a new all-time high against the Japanese yen this morning, touching the 158 yen level, where large offers put a halt to its progression.

Economists said the yen has been failing to enjoy any support from expectations that the Bank of Japan will deliver a rate hike this year, as traders seem to believe borrowing costs are not destined to rise much more after that.

'Prospects for low long-term rates in Japan remains a compelling argument for yen outflows,' said Russell Bloom at IFR Markets.

'European traders have been keen to exploit this theme early on in the year.'

The morning rally was helped by a larger-than-expected fall in German unemployment. German adjusted unemployment fell by 108,000 in December, against expectations for a 45,000 decrease, and supporting views that European rates will be heading higher.

'The European Central Bank (other-otc: CHPA.PK - news - people ) remains on course to hike the refi rate at least twice more in the first half of 2007, taking it to 4.0 pct from its current 3.5 pct,' said Stuart Bennett at Calyon, adding that it supports a strategy for more euro gains against the dollar, targeting 1.3560.

The dollar, however, has remained well-bid against the euro this morning, with economists attributing the move to trading flows and profit-taking ahead of a string of key US data today.

The ISM manufacturing index, the ADP employment index, vehicle sales, construction spending and the minutes from the Federal Reserve's last policy meeting are all due today.

'There is some room for surprises from the Fed minutes,' which has continued to cite upside risks to inflation despite a slowing economy, said Simon Derrick at Bank of New York (nyse: BK - news - people ).

Overall, however, the dollar is bound to be outshone by the euro and the pound, analysts said.

'Once we find ourselves in more normal trading conditions, maybe towards the end of the week, the euro will continue to share centre stage with the pound,' Derrick said.

The pound remained supported by economic data which has surprised to the upside over the past month, fuelling views that the Bank of England may raise rates at its February meeting.

Although it gained ground against the yen, the markets nevertheless saw some profit-taking against the dollar, bringing the pair down from the 1.9700 level towards 1.9666.