By Gary Stride

A DOW JONES NEWSWIRES COLUMN

LONDON (Dow Jones)--The yen is likely to hold center stage once again in the run-up to this weekend's Group of Seven meeting which takes place ahead of the annual get-together of the World Bank and International Monetary Fund in Singapore.

The currency posted strong gains Thursday after German Deputy Finance minister Thomas Mirow said yen weakness would be a subject of G7 discussion, as would the Chinese yuan.

ABN AMRO said the comments shouldn't have come as a complete surprise as EUR/JPY had recently been trading around all-time highs and the yen was widely considered to be undervalued relative to long-term fundamentals.

The yen surged against the high yielding currencies on Mirow's comments, breaching several key major trendline supports against the euro, pound and Swiss franc, and points to further downside in the crosses, noted J.P. Morgan.

Ahead of this weekend's risk event ABN AMRO says the market will remain nervous of holding yen short-funded carry trades, a fact born out my the latest IMM Commitment Of Traders report that showed the record yen shorts reported last week have been cut back.

Although IMM speculators had increased their total net short dollar holdings ($15.7 billion versus $14.6 billion), the total of speculative short USD/JPY positions had decreased to US$11.0 billion, from US$13.1 billion in the previous reporting period.

However Derek Halpenny, senior currency economist at the Bank Of Tokyo Mitsubishi UFJ, doubts the subject of yen weakness will get any real attention from the G7.

"How can this group (G7), which has been consistently calling for China to allow greater flexibility in managing its currency and allow market forces to dictate its direction, then question yen weakness given that the yen has been untouched by the Japanese authorities since March 2004," he said.

Halpenny recommends selling the yen if any further gains on G7 speculation bring the currency toward the Y115.00 against the dollar.

Early Monday the dollar is trading little changed from levels in New York Friday.

The dollar is at Y116.98 from Y116.93 late Friday according to EBS, while the euro was at $1.2680 from $1.2672. Against the Swiss franc the dollar was at CHF1.2469 from CHF 1.2475, while sterling was at $1.8654 from $1.8652.

Bloomberg TNI FRX POV

Reuters USD/DJ
Telerate 1066 or 1074

Thomson P/1066 or P/1074

(END) Dow Jones Newswires

September 11, 2006 03:15 ET (07:15 GMT)

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