FOREX-Yen falls vs dollar, euro after BOJ tankan survey

TOKYO, July 2 (Reuters) - The yen edged down against the dollar and euro on Monday as the Bank of Japan’s tankan business sentiment survey was in line with forecasts, supporting the view that the central bank will raise interest rates only gradually.

In the BOJ’s quarterly survey, the headline diffusion index for big manufacturers’ sentiment was plus 23, unchanged from the March survey and matching the market’s median forecast.

Market players were watching the data for clues on the timing of the BOJ’s next interest rate rise. The market expects the central bank to lift the overnight call rate to a 12-year high of 0.75 percent from the current 0.50 percent in the July-September quarter, mostly likely in August.

“We are expecting the BOJ to tighten credit in August, but we still need to see the outcome of the next industrial output figures and the GDP data,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

The dollar rose as high as 123.28 yen against the yen JPY= on electronic trading platform EBS following the release of the tankan. After the initial reaction to the BOJ data faded, it nudged back to 123.23 yen, still slightly up from around 123.15 yen in late New York trade on Friday.

Activity was a bit subdued as market participants were reluctant to build fresh positions aggressively as many U.S. players were away for a holiday-shortened week in the United States.

Demand for the dollar has been waning since Thursday, when the Federal Reserve left interest rates on hold and said core inflation had eased a bit, boosting the view that overnight rates will remain at 5.25 percent for some time.

This helped lower implied volatility on currency options, a prerequisite for putting on carry trades, in which dealers borrow in low-yielding currencies such as the yen and buy assets in currencies offering higher returns.

“Market participants continue to feel comfortable about carry trades,” said a trader at a Japanese trust bank.

“From looking at the movement in euro/yen, it’s obvious that people want to sell the yen more,” he said.

The euro climbed to 166.75 yen EURJPY=, staying within striking distance of the 166.94 all-time high yen hit last week.

The single European currency fell a tad to $1.3535 from $1.3540 in late New York trade EUR=.