FOREX-Dollar holds gains after Fed, Japan data

By Rika Otsuka

TOKYO, June 29 (Reuters) - The dollar held gains against the euro and yen on Friday after the Federal Reserve repeated worries about stubborn price pressures, reinforcing expectations that the central bank will stand pat on interest rates for some time.

The yen fell slightly after Japanese government data showed on Friday that consumer prices in the Tokyo area unexpectedly dipped 0.1 percent in June from a year earlier.

Japan's nationwide core CPI also slid 0.1 percent in May from a year earlier, in line with economists' consensus forecast and reinforcing expectations that the Bank of Japan will raise interest rates only gradually.

That view made speculators feel comfortable about yen carry trades, in which investors borrow the low-yielding Japanese currency to buy assets in currencies with higher interest rates.

"With volatility in the dollar/yen falling, conditions in the market are favouring yen carry trades again," said Mitsuru Sahara, a senior trader at Bank of Tokyo-Mitsubishi UFJ. "It looks like there will be another round of yen selling soon."

The market expects the BOJ to lift interest rates to a 12-year high of 0.75 percent from the current 0.5 percent as early as August.

But even after the expected rate rise, Japanese interest rates will remain the lowest among the industrialised countries.

The dollar was supported after the Fed said on Thursday its main concern was that inflation might fail to moderate after it held interest rates steady at 5.25 percent, as expected.

"The Fed's statement cemented the market's view that the central bank will not move for a while," said Tsutomu Soma, a senior manger at Okasan Securities.

Some saw the Fed's post-meeting statement as a bit hawkish because the Fed did not express concerns about the U.S. housing market or the troubled subprime mortgage sector, while noting inflationary pressure.

In a Reuters poll of primary dealers taken shortly after the release of the Fed statement, nine out of 17 expected the central bank to stay on hold at least through this year, and an equal number said the Fed's next move would be a rate cut. Five said the Fed's next move would be a rate hike. [ID:nNAT002879] The dollar rose 0.1 percent from late U.S. trading to 123.25 yen JPY=, moving towards a 4-1/2-year high of 124.14 yen hit earlier this month.

The euro eased against the yen to 165.55 yen EURJPY=, staying below an all-time high of 166.94 yen hit last week.

The single European currency dropped to $1.3430 from $1.3450 in late New York trade EUR=.

The euro was weaker across the board as investors booked profits on the last trading day of the second quarter.

The euro hit a four-month low against the sterling EURGBP=R on Friday just above 67 pence.

YEN SELLING RESUMES

Japanese Finance Minister Koji Omi made no comments on foreign exchange rates on Friday after causing a stir earlier this week by saying the market should be aware of the risks of one-way bets, an apparent reference to yen carry trades.

Yen carry trades have been a big force behind the yen's general weakness. The Japanese currency touched an all-time low against the euro, a 20-year low against the New Zealand dollar and a 16-year low against the Australian dollar last week.

The New Zealand dollar was steady at 94.75 yen NZDJPY=R. It jumped around 13 percent against the yen in April-June and rose by the same percentage point since the start of the year.

The Aussie AUDJPY=R was up 0.2 percent against the yen, extending its rally a day after it climbed over 1 percent.

Against the Japanese yen, the Aussie rose nearly 10 percent in the second quarter and was up 11 percent since the beginning of the year.