By Ye Xie
(Bloomberg) -- The euro may extend its gain against the yen on expectations Europe's interest-rate advantage over Japan will widen.
European Central Bank governing council member Axel Weber yesterday said policy makers might need to increase borrowing costs to keep inflation under control. The Bank of Japan left its interest rate yesterday unchanged at 0.5 percent, the lowest among industrialized nations, compared with 4 percent in the euro zone.
``Weber is quite hawkish,'' said Hidetoshi Yanagihara, senior currency trader at Mizuho Corporate Bank in New York. ``The euro should be stronger against the yen from the perspective of interest-rate differentials.''
The yen traded at 166.51 versus the euro and 117.28 against the dollar at 6 a.m. in Tokyo. Japan's yen touched 167.64 per euro yesterday, the weakest since July 23, when it reached the all-time low of 168.99. The euro traded at $1.4195.
``If risks to price stability are threatening to materialize, monetary policy can't lose sight of its primary mandate -- even if that means no longer supporting the robust economy or becoming restrictive,'' Weber, who also heads Germany's Bundesbank, said in the text of a speech in Munich. There may be an ``additional need'' to raise interest rates, given the ``expected acceleration in euro-region inflation over the coming months.''
The ECB retreated from plans to raise the key interest rate last week, saying it wanted to assess the economic effect of rising credit costs and financial-market turbulence caused by the U.S. housing slump.
`Resume Raising Rates'
``The ECB may resume raising rates on the six-month horizon,'' said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. ``That will keep people bullish on the euro.''
The BOJ yesterday voted 8-1 to keep rates on hold, with board member Atsushi Mizuno the only dissenter. All 39 economists surveyed by Bloomberg News predicted the decision.
Japanese policy makers have ``seen some improvement in global financial markets, yet some uncertainties remain,'' BOJ Governor Toshihiko Fukui told reporters in Tokyo after the decision. ``The biggest uncertainty right now is how much U.S. housing prices will fall.''
The BOJ
``There's a disbelief that the BOJ is going to do anything ever,'' said Robert Fullem, vice president of U.S. corporate foreign exchange sales at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.
South Africa's rand gained 2 percent against the dollar yesterday, after the central bank unexpectedly raised its benchmark interest rate by half a percentage point to 10.5 percent. The New Zealand dollar rose to as high as 77.49 U.S. cents, the highest since July 27.
The Swiss franc fell to a record low of 1.6829 per euro on speculation Switzerland's central bank may keep the benchmark interest rate at 2.75 percent.
The Australian dollar touched 90.60 U.S. cents, the strongest in 23 years, after the unemployment rate unexpectedly declined to the lowest since 1974.
The pound fell versus 15 of 16 major currencies after a survey showed U.K. house prices declined at the fastest pace in two years last month. Canada's dollar rose to a 31-year high of $1.0278 as prices of the nation's commodity exports advanced.
To contact the reporter on this story: Ye Xie in New York at yxie6@bloomberg.net
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