TOKYO Mon Jul 2 - The yen stayed near a 4 1/2-year low against the dollar and an all-time trough versus the euro on Monday after a Bank of Japan business sentiment survey supported the view that Japanese interest rates will rise only gradually.
The yen fell against the dollar and euro after the BOJ's quarterly tankan poll came in line with forecasts, but trimmed losses as investors were careful about selling the yen too much ahead of a holiday-shortened week in the United States.
Sterling hit a 2 1/2-month high versus the dollar at $2.01, inching near a 26-year high before the Bank of England holds a policy meeting later in the week, when it is expected to lift rates by 25 basis points to 5.75 percent.
Investors flocked to high-yielding currencies, keeping the low-yielding yen under selling pressure as market players used the Japanese currency to fund purchases of assets in currencies that offer higher rates in what is known as the carry trade.
Many analysts say this trend will continue to keep the yen weak -- even if the BOJ lifts rates by 25 basis points to 0.75 percent as early as August, as markets expect -- so long as rate rises in Japan continue to come at a snail's pace.
"The tankan confirmed sluggishness in Japan's recovery, weighing on the yen," said Masaki Fukui, senior market economist at Mizuho Corporate Bank, after the poll's headline diffusion index for big manufacturers came in at plus 23, stable from March and matching forecasts.
"At the same time, the survey was not weak enough to scale back expectations for a BOJ rate hike in August. So its impact on the foreign exchange market was limited," Fukui said.
The dollar rose as high as 123.28 yen on electronic trading platform EBS, before slipping to 122.95 yen, down around 0.15 percent from levels late on Friday. The U.S. currency stayed in range of a 4-1/2-year high of 124.14 yen hit last month.
U.S. markets will be closed on Wednesday for Independence Day.
The euro climbed as high as 166.88 yen in early trade before pulling back to 166.45 yen. Still, it stayed close to an all-time high of 166.94 yen hit last week.
The single European currency slipped a touch to $1.3535 from $1.3540 in late New York trade.
Traders said an incident in which a burning vehicle was driven into the main terminal at Glasgow's airport at the weekend, which followed a thwarted bomb plot involving two cars in central London late last week, was having limited impact on the Tokyo market on Monday.
In addition to the BoE, the European Central Bank and the Reserve Bank of Australia will also hold policy meetings this week. Markets expect the central banks to keep rates steady at 4.0 percent and 6.25 percent, respectively.
CARRY ON CARRYING
Demand for the dollar has been waning since Thursday, when the Federal Reserve left interest rates on hold and said core inflation had eased a bit, boosting the view that U.S. overnight rates will remain at 5.25 percent for some time.
"The dollar has been slipping versus the euro since last week, and this week's biggest risk will be for that to continue," said a trader at a Japanese bank.
He added that euro gains versus the dollar may help to pull European currencies even higher against the yen.
Currency speculators boosted their bets against the yen to a record high in the week to June 26, data from the Commodity Futures Trading Commission showed on Friday.
High-yielding currencies continued to shine, with the Australian dollar hitting an 18-year high against the dollar around $0.8538 and hovering around 104.85 yen, near a 16-year high.
The New Zealand dollar, which yields a whopping 8.0 percent, hit a 20-year high against the yen. Against the dollar, the kiwi climbed as high as $0.7759, the highest level since the currency was floated in 1985.
