U.S. unit weaker versus other rivals as Dubai worries fade, risk appetite revives By William L. Watts, MarketWatch LONDON (MarketWatch) -- The U.S. dollar remained modestly higher versus the Japanese yen Tuesday after the Bank of Japan decided at an emergency meeting to make available 10 trillion yen for short-term loans to commercial banks in an effort to fight off deflationary pressures. "The policy action had less to do with expanding credit to the system and more to do with weakening the yen, which had become dangerously strong for Japanese exporters as it approached the 85-yen handle" versus the dollar, said Boris Schlossberg, director of currency research at GFT. The dollar traded at 86.90 yen, up from 86.31 yen in North American trade late Monday. The dollar and yen were both lower versus most major rivals, with investors shunning the low-yielding currencies in favor of higher-yielding assets. Concerns about Dubai's debt problems faded and a gauge of manufacturing activity in China indicated the fastest pace of expansion in five years. Read about Chinese PMI data. The yen hit a 14-year high versus the dollar last week, adding to deflationary pressures as a strong yen reduces the price of imported goods. A stronger yen also makes exports more expensive and less competitive in overseas markets. The central bank unanimously voted to keep its overnight call-rate target at 0.1% but also set up a new 10 trillion yen ($120 billion) lending facility, which will accept as collateral Japanese government bonds, corporate bonds, commercial paper, and deeds on loans. See full story on the BOJ's liquidity measures. Strategists said the move may not be enough to stem the yen's strength for long. The mere announcement of the emergency meeting was likely enough to spook yen bulls into trimming long positions, sad Daragh Maher, currency strategist at Calyon. "They may be smarting from that. But I think that nothing we heard from the BoJ will have materially changed the market's short-term view on the yen, which is to buy it," he said. Schlossberg said the dollar's initial rally to a high around 87.50 yen came on the assumption that the benchmark rate would be lowered to zero, with the dollar/yen pair then dropping back below 87 yen after the cut failed to materialize. The longer-term direction of the dollar/yen will likely revolve around levels of risk appetite, he said. A round of disappointing U.S. economic data, for instance, could dash the revival in risk appetite, sending the dollar back toward 85 yen. The dollar and yen have both tended to lose ground versus other currencies when risk appetite is on the rise and to gain ground when risk appetite falls. The dollar index (DXY 74.50, -0.38, -0.50%) , a measure of the U.S. unit against a trade-weighted basket of rivals, fell to 74.533. U.S. stock index futures rose, boosted by hopes the crisis over the debt woes in Dubai will remain contained in the region. See Indications. The dollar gained ground and equities fell last week as risk appetite was dented by concerns surrounding Dubai World's call to delay repayment of its debt. The euro rose to $1.5067, up from $1.5007 in North American trade late Monday. Risk-related flows helped lift the pound, Schlossberg said. The currency traded at $1.6583 versus the dollar, up from $1.6446. The Australian dollar was higher after the Reserve Bank of Australia met market expectations by raising its key interest rate to 3.75%, a rise of a quarter of a percentage point. Read about Australia's rate hike. The Aussie traded at 91.68 U.S. cents, up from 91.37 U.S. cents. The hike follows tightening moves by the RBA in October and November. The Aussie and other commodity-oriented currencies have been the biggest beneficiaries of rising risk appetite. But Robert Ryan, foreign-exchange strategist at BNP Paribas, warned that evidence of a plateau in Asian trade and industrial production suggests caution may be warranted, with attention now turning to Chinese data and other indicators of demand for Australian exports. The RBA statement "should be sufficient to support an eventual move back towards [93.00 U.S. cents], but as positioning is reduced into year-end, we expect further Australian dollar gains to be limited," Ryan said.

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