Dollar down ahead of BoJ interest rate decision

TOKYO (AFP) - The dollar languished close to record lows against the euro and lost ground against the yen in Asian trade Thursday ahead of a Bank of Japan decision on interest rates, dealers said.

The dollar eased to 122.30 yen in Tokyo morning trade from 122.45 in New York late on Wednesday.

The euro firmed to 1.3750 dollars from 1.3741 but slipped to 168.14 yen from 168.28.

"Trading has lost direction as market participants are looking at the prospects for the US economy after mixed indicators," said Daisuke Uno, market analyst at Sumitomo Mitsui Banking Corp.

The market remained wary about prospects for the US economy in light of the current problems in sub-prime mortgages taken out by higher-risk borrowers.

"The fear remains that the problems in the US housing market may spill over into the wider economy," said Westpac Banking Corp chief currency strategist Robert Rennie.

The dollar eased despite remarks from US central bankers playing down worries about the impact of the housing market woes on the wider economy.

The head of the Federal Reserve Bank of Philadelphia, Charles Plosser, said the housing troubles were unlikely to have significant spillover effects on the rest of the economy.

Federal Reserve Board governor Kevin Warsh agreed that the sub-prime problems did not appear to have imposed significant strains on the financial system while some analysts also remained optimistic.

"We continue to expect a soft landing in the US," National Australia Bank senior strategist John Kyriakopoulos wrote in a note to clients.

The market was waiting to see whether Bank of Japan governor Toshihiko Fukui would signal an August interest rate rise at a press conference later Thursday when the central bank is expected to hold its key rate at 0.5 percent.

Markets expect one or two of the nine BoJ policy board members to call for a rate hike this time round, increasingly market expectations for a rise next month, said Toru Umemoto, chief forex strategist at Barclays Capital.

But some analysts questioned whether Fukui would drop any clear hints on the rate outlook given the upcoming election in Japan and the unpopularity of Prime Shinzo Abe's government.

"With no change in the glacial pace of interest rate increases (in Japan) it's hard to see why Japanese investors won't continue to invest abroad in high yielding currencies," said NAB's Kyriakopoulos.