* Most markets shut on Wednesday for Christmas
* U.S. durable goods data surprises on upside in November
* Thin market conditions mute forex response to U.S. data
By Lisa Twaronite
TOKYO, Dec 25 The dollar drifted higher on
Wednesday in extremely thin trade, with most markets closed for
the Christmas holiday, as investors digested upbeat U.S.
economic data that validated the Federal Reserve's decision to
begin paring its stimulus.
"Basically, major currency pairs are moving in a trendless
way because of the holiday conditions," said Masashi Murata,
senior currency strategist at Brown Brothers Harriman in Tokyo.
Thin trade can sometimes amplify moves and lead to
volatility, he added, though he said this appears unlikely, with
no major events scheduled for the rest of the week.
The dollar gained about 0.2 percent to 104.39 yen,
near a five-year high of 104.64 hit on the EBS trading platform
on Friday. Market participants cited option-related positions at
the 105 yen level, which is the next major resistance for the
The euro was slightly higher on the day against its Japanese
counterpart at 142.65 yen, not far from a five-year
high of 142.90 yen also set last week.
Against the dollar, the euro edged down about 0.1 percent to
$1.3666, holding above last Friday's two-week low of
The dollar index, which tracks the greenback against a
basket of major rivals, gained about 0.2 percent to stand at
80.585 , moving back toward last week's two-week
high of 80.827.
U.S. data on Tuesday showed orders for long-lasting U.S.
manufactured goods surged in November and a gauge of planned
business spending on capital goods recorded its largest increase
in nearly a year, pointing to sustained strength in the economy.
While another report on Tuesday showed new home sales
slipped in November, sales in October were revised to show the
highest pace in more than five years. In addition, house prices
rebounded, underscoring the economy's improving fundamentals.
U.S. market reaction to the data on Tuesday was subdued,
with many market participants already away for the holiday.
"Market reaction in normal times would probably be triple
what we have seen," Steven Englander, global head of G10 FX
strategy at CitiFX, said in a note to clients.
The reason, he explained, was that "liquidity and market
interest are both close to zero. Thursday should not be much
Englander cited a small chance that currency markets would
catch up to the latest U.S. economic developments on Friday or
Monday, but with most investors already focused on 2014, it may
be early January before active trading resumes.
The Fed announced a week ago that it would pare its monthly
purchases of Treasuries and mortgage-backed securities in
January by $10 billion, to $75 billion.
It offset the stimulus reduction by declaring it would
maintain short-term rates near zero "well past the time" that
the jobless rate falls below 6.5 percent, especially if
inflation expectations remain below target.
By contrast, Japan's central bank remains committed to
maintain its ultra-loose monetary policy until 2 percent
inflation is achieved, a vow repeated by Bank of Japan Governor
Haruhiko Kuroda on Wednesday.
Japan's consumer inflation is likely to exceed 1 percent in
the first half of next year and help heighten inflation
expectations in a country mired in deflation for 15 years,
Kuroda said in a speech in Tokyo.
These divergent outlooks for the two countries' monetary
policies will continue to favour the dollar over the yen in the
year ahead, many strategists and market participants say.
Investors in Asia continued to watch China's interbank
market. Rates spiked to their highest level since June this
week, partly due to seasonal factors that increase banks' demand
for cash near the end of each quarter.
On Wednesday, China's short-term money market rates extended
their fall as corporate tax refunds deposited to commercial
banks helped ease liquidity conditions.
A day earlier, China's central bank injected funds through
normal channels for the first time in three weeks, but traders
warned that conditions remained tense.