* Dollar retreats vs euro after jumping late last week
* Yen falls after Bank of Japan rate cut
* Volatile movements expected in holiday-thinned trade
* BOJ cuts view on output, expects exports will fall sharply
By Satomi Noguchi
TOKYO, Dec 22 (Reuters) - The dollar fell against the euro on
Monday, giving up some of its gains made after the U.S.
government offered a lifeline to Detroit carmakers, as investors
remained concerned over the deepening economic recession.
The dollar had posted its biggest daily gain against the euro
in almost two months on Friday, with traders saying the U.S.
currency's slump after the Federal Reserve's interest rate cut to
near zero earlier in the week was probably overdone.
Dealers said the U.S. rescue of General Motors Corp <GM.N>
and Chrysler LLC [] had averted a crisis for now, but
uncertainty remained over how the companies' restructuring plans
demanded in return for the bailout would impact the economy
already in a deep and long recession.[]
"The picture that the currency market is painting for the
U.S. economy next year is not as hopeful as the one in the
stabilising stock markets," said Kengo Suzuki, a currency
strategist at Shinko Securities.
"Last week's dollar slump was too much too fast, but the
market is pointing that the next trend is in that direction,"
Suzuki said.
The euro rose 0.7 percent from late New York trade on Friday
to $1.4013 <EUR=> after falling to as low as $1.3824, according
to EBS. It soared as high as $1.4720 on EBS on Thursday.
"The Fed is about to go and print money, boosting dollar
supply to support the economy. It is not hard to imagine the
dollar's value falling from here on," said a chief fund manager
at a Japanese asset management firm.
"Given the outlook for currencies, bonds in the euro zone
look relatively attractive with their higher yields, if one had
to choose between them and U.S. Treasuries," the fund manager
said.
The yield on 10-year U.S. Treasuries <US10YT=RR> fell to a
five-decade low near 2 percent last week while the 10-year Bund
yield <EU10YT=RR> also hit its lowest since at least 1999, but
traded around 3 percent.
The sudden reversal in the euro's sharp gains late last week
was triggered after the European Central Bank said it would
reduce the return it offers to those banks that hold cash with
it. That revived speculation of a further ECB interest rate cut
in January to combat a recession in the euro zone economy.
But recent comments by council members have suggested the
bank may be divided on the best near-term course of action, an
impression reinforced by remarks made by ECB Executive Board
member Lorenzo Bini Smagi in a newspaper interview.
[]
The dollar rose versus the yen, holding gains made late last
week after the Bank of Japan lowered its policy rate down close
to zero, mirroring the Fed move.
The U.S. currency rose 0.6 percent to 89.86 yen <JPY=>, off a
13-year low of 87.13 yen touched last week.
Now that Japan has little room to lower rates further, market
participants are eyeing what steps the BOJ might take next to
battle the recession.
"From now on, what the BOJ is expected to do is focus on
taking quantitative easing measures," said Yuji Saito, head of
the FX sales department at Societe Generale.
The BOJ cut its assessment of output and said exports were
expected to decline sharply on the slowdown in overseas economies
and the stronger yen, the central bank said in its monthly report
issued on Monday. []
Meanwhile, BOJ Governor Masaaki Shirakawa said on Monday that
Japan's economy was deteriorating and conditions were likely to
become more severe. []
Data on Monday showed Japan's exports fell at a record annual
pace in November, while a Reuters poll showed Japanese
manufacturers' business sentiment hit a historic low in December
and logged the sharpest month-on-month drop on record.
[]
The euro climbed 1.3 percent to 125.84 yen <EURJPY=>, helping
the single euro zone currency's gains against the dollar.
Trading volume is expected to be light with many market
players leaving for the Christmas holiday and ahead of Japan's
market holiday on Tuesday, making movements volatile.
(Additional reporting by Kaori Kaneko; Editing by Chris
Gallagher)
