* U.S.-Japan wide rate differential one reason for yen weakness
* Euro climbs to 32-year peak vs yen
* Japan's Kanda again warns on excessive FX moves
* U.S. new home sales slump to six-month low
By Gertrude Chavez-Dreyfuss
NEW YORK, June 26 (Reuters) - The yen sank to its lowest against the U.S. dollar in
nearly 38 years on Wednesday, as wide interest rate differentials between the two economies in
favor of the greenback continued to pummel the Japanese unit, keeping traders on alert for any
sign of intervention from Japan to boost its currency.
The U.S. dollar rose to as high 160.82, its strongest level since December 1986.
The greenback was last up 0.7% at 160.697 yen. So far this year, the dollar has gained about 14%
versus the yen.
The euro also surged against the yen, rising to 171.79, its highest since September 1992. It
was last up 0.3% at 171.625.
Japan's low interest rates, compared to that of the United States, have hammered the yen.
While Japan has raised interest rates this year to a range of zero to 0.1%, U.S. rates of 5.25%
to 5.5% mean investors are flocking to dollar assets for higher returns.
Investors are taking advantage of the big difference in rates in both countries by
undertaking so-called carry trade strategies, in which investors borrow in low-yielding
currencies to invest in higher-yielding ones. Carry trades have become hugely popular as some
countries raised borrowing costs in recent years.
Analysts said traders are testing the resolve of Japan's Ministry of Finance, which spent
$62 billion in late April and early May to support the currency when it fell past 160.
"Interventions tend to slow the market in general, but they struggle to reverse the market's
direction significantly unless there is a major change in underlying monetary policy stances,"
said Vassili Serebriakov, FX strategist, at UBS in New York.
"For dollar/yen, it would be more powerful if the Bank of Japan hikes rates more
aggressively, or the Federal Reserve starts cutting rates. But absent both developments, I'm not
sure we can see a significant reversal. Intervention though can certainly limit its upside."
Japan's top currency diplomat Masato Kanda ramped up his warnings on excessive currency
moves on Wednesday, saying authorities were "seriously concerned and on high alert" about the
yen's rapid decline.
He noted that the yen's current weakness is not justified.
There is a chance, however, of a further rate hike from the Bank of Japan in late July,
which could help support the yen.
The dollar index, which tracks the currency against six peers, rose 0.4% to 106.05.
SOFT US HOUSING DATA, PCE NEXT
U.S. new home sales came in weaker than expected. Sales of new U.S. single-family homes
dropped to a six-month low in May, falling 11.3% to a seasonally adjusted annual rate of 619,000
units last month. The dollar showed little reaction to the data, which added to growing evidence
that the world's largest economy is slowing down.
The market's next focus will be Friday's U.S. personal consumption expenditures index (PCE),
the preferred Fed gauge on inflation. Investors want to see whether prices pressures in the
economy are trending in the right direction. A lower-than-expected number could trigger a rise
in rate cut bets this year, providing some relief to the yen.
"The PCE is less likely to get outsized data than you would when measuring CPI (consumer
price index)," said Eugene Epstein, head of structuring for North America at Moneycorp in New
Jersey. "That being said, there needs to be a really large variation in the PCE to change the
dynamic on rate cuts."
The euro slid 0.3% to $1.0679 after a European Central Bank policymaker talked up
the chances of further rate cuts this year, a notably different stance from the Fed's Michelle
Bowman.
ECB governing council member Olli Rehn told Bloomberg that two more cuts this year seemed
"reasonable". That contrasted with Bowman, who said she did not expect any U.S. rate cuts this
year.
Elsewhere, Australian inflation accelerated to a six-month high of 4% in May, with traders
scrambling to price in a strong chance of a further rate hike by November. The Aussie dollar was
up 0.1% against the U.S. dollar at US$0.6655 .
Sterling fell 0.5% versus the dollar to $1.2627.
The yuan was also getting squeezed by the dollar's stubborn strength, with China seemingly
having signalled some tolerance for a cheaper currency by gradually weakening the midpoint of
the yuan's daily trading range on the dollar.
The yuan, which has hugged the low side of its band for months, slumped to a seven-month
trough on Wednesday of 7.2671 per dollar. The dollar was last little changed
at 7.2667.
Currency
bid
prices at
26 June
06:58
p.m. GMT
Descripti RIC Last U.S. Pct YTD Pct High Low
on Close Change Bid Bid
Previous
Session
Dollar <=USD 106.03 105.67 0.36% 4.60% 106.13 105.
index > 6
Euro/Doll 666
Dollar/Ye 705
Euro/Yen 86
Dollar/Sw 48
Sterling/ 666
Dollar/Ca 51
Aussie/Do 636
Euro/Swis 62
Euro/Ster 34
NZ 76
llar
Dollar/No 994
Euro/Norw 39
Dollar/Sw 833
Euro/Swed 399
(Reporting by Gertrude Chavez-Dreyfuss in New York and Harry Robertson in London; Editing by
Emelia Sithole-Matarise, Bernadette Baum and Josie Kao)