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The dollar gained against the yen on Wednesday as sentiment on the banking sector improved and after better than expected data the previous session signalled the US economy may be in better shape than many had feared.
Equities rose as investor sentiment on the troubled financial sector got a boost after Lehman Brothers Holdings raised $4 billion of capital on Tuesday, quelling some speculation that the investment bank may be in trouble.
Other banks continue to suffer, with UBS and Deutsche Bank together taking a $23 billion hit on their risky assets, but some investors took this as a sign that the worst is over for the banking giants.
"The banks are able to raise capital decreasing the probability of very bad outcomes for the financial sector, which is positive for the dollar against the yen," said Adarsh Sinha, currency strategist at Barclays Capital. The yen tends to suffer when risk appetite increases as investors move into the carry trade where they borrow the low yielding currency to fund investments in higher return assets.
The dollar also got a boost on Tuesday from better than expected data on US manufacturing activity for March, which eased expectations on the extent of monetary easing from the Federal Reserve. "Positive economic data from the US has cut expectations that the Fed is set to cut rates by 50 basis points (from 2.25 percent) and the market is now pricing in a higher probability of 25 basis points," said Sinha at Barclays Capital.
By 1041 GMT the euro was up 0.2 percent at $1.5644 but well off a record high around $1.5905 hit last month. The US currency was up 0.3 percent at 102.13 yen, after climbing to a three-week high around 102.30 yen earlier in the day.
But some said that dollar demand would be short-lived as they expect crucial data on US employment later in the week will show continuing weakness in the job market, suggesting that the economy is still struggling. US non-farm payrolls on Friday are expected to show a fall in jobs for a third straight month in March.
For clues about the likely outcome of the official data, investors will look to a report on private sector employment from Automatic Data Processing (ADP) due at 1215 GMT. The ADP report is expected to show that private sector employment shrank by 48,000 jobs in March.
Analysts are also awaiting more signs on the outlook for US interest rates from Federal Reserve Chairman Ben Bernanke who testifies before Congress at 1330 GMT. "Unless Bernanke's comments leave the impression that the Fed is no longer in full control of the situation, short-covering may provide the dollar with a bit more support," said Dresdner Kleinwort in a note to clients.

Copyright Reuters, 2008

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