Dollar Hits 3-Week Low Against Yen

LONDON -- The dollar fell to three-week lows against the yen Tuesday, dragged down by talk that Tokyo could unveil a larger-than-expected economic stimulus package.

European stocks were flat, unsettled by a 1.15 percent fall on Wall Street overnight and growing fears about higher interest rates.

European government bonds edged higher although the mood was bearish. Currency markets saw most of the morning's action.

The dollar suffered after Japanese Finance Minister Kiichi Miyazawa said overnight he could not comment on the exact size of the supplementary budget next month, but that it seemed to be getting bigger.

The dollar fell as low as 104.70 yen, down about 0.75 percent from its Asian peak. Sales of dollars for yen by a U.S. bank that was trying to trigger stop-loss orders at 104.80 were also cited by traders as a factor behind the drop.

"This move is partly to do with Miyazawa's comments, which suggested that the stimulus package might be higher than people were anticipating," said Jeremy Hawkins, chief economic adviser at Bank of America in London.

"But until we actually see the package, the 104 level is likely to hold."

The euro also ceded ground to the broadly stronger yen, sliding to four-week lows of 111.73.

A background factor in the weaker dollar was the overnight losses on Wall Street, which prompted renewed worries of dollar sales by foreign investors quitting U.S. asset markets.

The sell-off in New York helped set the tone for a dull morning's trade on European bourses. Monday's warning by European Central Bank chief economist Otmar Issing about inflation risks in Europe sparked fresh interest rate hike worries and rattled investors.

The index of Europe's leading shares was down 0.4 percent by midmorning.

London's blue-chip FTSE 100 index was nudged lower by oil giant BP Amoco, which lost 2 percent after an across-the-board decline in U.S. oil stocks. Shell dipped 1.6 percent.

Three British blue chip stocks reported results or delivered trading updates. Of these only Abbey National, with a positive trading statement, provided any real trading impetus.

Abbey stock gained 3.3 percent, a clear front-runner in the FTSE. Of the others, drinks group Allied Domecq and British American Tobacco reported results in line with expectations.

"None of them have disappointed ... but it's a bit of a token week," one head trader at a British investment bank said, lamenting the dearth of market-moving news.

Frankfurt slipped in and out of profit. Banking stocks were in the spotlight with Deutsche falling 2 percent after reporting an expected slowdown in third quarter earnings.

In debt markets, the euro zone government bond markets were a touch higher with traders expecting a range-bound session with technical factors influencing market direction.

"We expect this market to range trade today between 103.08 and 103.70 but I think there is more potential for the downside in the Bund future," a Frankfurt-based trader said.