Dollar edges up as Tokyo ponders rates

The dollar edged up against the yen today, pulling away from a five-week low, as investors doubted that a potential interest rate increase by the Bank of Japan on Wednesday would do much to boost the Japanese currency.

In Tokyo’s stock market, the Nikkei average was down 0.6% early this afternoon from Monday’s nearly 7-year record close.

Financial markets were closed Monday in the U.S. for Presidents Day as well as Monday and Tuesday in many Asian countries for the Lunar New Year holiday.

Stock investors locked in profits in Shin-Etsu Chemical Co. and other blue-chip issues today. The Nikkei was down 98.71 points to 17,841.38. On Monday, the benchmark rose 0.4% to 17,940.09, its highest close since May 8, 2000.

The broader Topix index was down 0.6% to 1,768.84 after rising as high as 1,782.58 on Monday, nearing its 2006 peak of 1,783.72. A break above that level would take the Topix to its highest level since 1991.

In the currency market, traders were divided over whether the Bank of Japan, whose two-day meeting ends Wednesday, would lift its key rate to 0.5%, the highest level in a decade, from 0.25% after the central bank kept rates steady last month in a split decision.

Prices of derivative contracts indicated about a 60% chance of a rate boost, up from about 30% to 35% last week.

Even if the central bank raises rates, investors increasingly believe that the yen will still suffer because rates are so much higher in the United States, at 5.25%, and in the euro zone, at 3.5%.

Japan’s ultra-low rates have spurred market players to use the currency as a source of cheap funds to buy higher-yielding currencies, in a practice known as the carry trade, and have prompted many domestic investors seeking better returns to invest in foreign assets.

Currency strategists at RBC Capital Markets said that regardless of whether Japan raises rates, they expect the dollar and euro to resume their climb against the yen as carry trades are reestablished.

The dollar edged up today to 119.70 yen from 119.54 yen Monday in late London trading, recovering from a five-week low of 118.98 yen hit Friday. The U.S. currency reached a four-year peak of 122.20 yen in late January.

The euro rose to 157.43 yen from 157.23 yen.

The 13-nation currency was little changed against the dollar at $1.3153 but holding near a six-week high of $1.3173 hit last week.

Since the Bank of Japan scrapped its policy of holding rates at virtually zero, the central bank has held them steady for seven months as the economy has had a tough time pulling out of deflation with core consumer prices barely rising.

Official data last week showing that the Japanese economy expanded at a robust 4.8% annualized pace in the last three months of 2006 has helped keep alive the possibility of a rate increase this week.

The dollar was still feeling the sting from a string of weak economic data last week and comments from Federal Reserve Chairman Ben S. Bernanke that were seen by some as suggesting that the Fed was more likely to cut rates next than raise them.

With both the Fed and Bank of England scheduled to issue minutes of their latest rate-setting meetings Wednesday, eyes were firmly on the global rate outlook.

“The minutes may give some insight into the perceived balance of risks between growth and inflation and what it means for future monetary policy in the U.K. and the U.S.,” analysts at Lloyds TSB Corporate Markets wrote in a research note.

Monday’s biggest mover in global currency markets was the British pound, which fell sharply after Britain’s central bank warned that some currency depreciation would probably be necessary to narrow Britain’s large trade deficit.

Oil slipped Monday to below $59 a barrel in U.S. electronic trading amid expectations of warmer weather in the U.S. and threats to supply in Nigeria.

Stocks elsewhere surged Monday on a wave of merger-and-acquisition news, particularly in the retail sector, and on strong prospects for mining companies enjoying buoyant base metal prices.

The pan-European FTSEurofirst 300 index, driven since last year by a boom in takeovers and forecast-beating earnings, closed unofficially at 1,549.6, its highest close since 2000.

Paris’ CAC-40 index, Frankfurt, Germany’s DAX and London’s FTSE 100 index also hit their highest levels in more than six years.

The top gainer was Germany’s DaimlerChrysler, up 3.6% on talk that several suitors had emerged for its money-losing Chrysler unit in the U.S. and that it had been discussing a sale to General Motors for at least two months.

Anglo American led the charge among mining companies, climbing 3.3% after a report that it planned to buy back as much as $4 billion in stock.