TOKYO, (AFP) - The dollar hit a near three-month high against the yen in Asian trade Thursday on expectations that Japan's central bank will maintain its low interest rates for now amid slowing growth, dealers said.
They said that the greenback also enjoyed support from US data released overnight showing a surprise rebound in new home construction and a stronger than expected rise in industrial production.
The dollar edged up to 120.85 in Tokyo morning trade from 120.81 in New York late Wednesday, the highest level since February 26.
The euro firmed to 1.3528 dollars from 1.3513 and to 163.45 yen from 163.26.
Players were betting that the Bank of Japan would leave interest rates on hold at 0.5 percent at the end of a two-day meeting later Thursday as economic growth slows and consumer prices turn lower.
Earlier the government said Japan's economy grew by 0.6 percent in the first quarter of 2007 or an annualised 2.4 percent, slowing sharply from the strong pace of the fourth quarter of last year.
Growth was slightly below market expectations for a quarter-on-quarter expansion of 0.7 percent and an annualised rate of 2.6 percent.
The figures were "more or less as expected" so did not have a major impact on currencies, said Kosuke Hanao, head of forex sales at HSBC in Tokyo.
But, together with a surprise drop in Japan's machinery orders in March, the data underpinned expectations that the Bank of Japan is unlikely to raise interest rates again before the second half of 2007.
Although the GDP deflator was slightly better than expected, it remained in negative territory, pointed to continued deflationary pressures, noted Barclays Capital forex strategist Toru Umemoto.
"Political as well as economic and price factors are expected to prevent the BoJ from raising interest rate until the monetary policy meeting in August, in our view," he wrote in a note, referring to upper house elections in July.
"This is likely to encourage investors to increase yen carry trades, which will gradually bring the yen lower in the medium-term," he added.
In the yen carry trade, people borrow cheap credit in countries with low interest rates such as Japan to invest in highly yielding currencies elsewhere.
The dollar rose in overseas trade Wednesday on news that the number of new US homes beginning construction rose 2.5 percent in April from March to 1.528 million units, its highest level for three months.
A separate report that showed US industrial production rose a stronger-than-expected 0.7 percent also helped give the dollar a boost.