Dollar edges up as data in focus, yen sags on corporate tax cut report

TOKYO (Reuters) – The dollar retook some lost ground on Tuesday in anticipation of potentially strong retail sales data, while the yen sagged on a media report Japanese Prime Minister Shinzo Abe is considering a corporate tax cut.

The dollar rose 0.6 percent to fetch 97.52 yen, extending its rebound from a seven-week low of 95.81 touched last Thursday.

The catalyst for the move in Asia was centered on a report by Japanese business daily Nikkei that Abe is considering a corporate tax cut as a way to offset the potential economic drag of a planned two-stage hike in the sales tax.

Investors who have been betting on Abe’s success to pull Japan out of perennial deflation have long been hoping for more steps to boost the economy on top of the government’s aggressive fiscal and monetary expansionary policies.

“There have been concerns that the Abe may make changes to the planned tax hike, backpedaling on reforms. But if you believe today’s media report, Abe is heading for a right direction,” said Yunosuke Ikeda, senior FX strategist at Nomura Securities.

The tax cut report boosted Japanese shares and provided further support to the dollar/yen, which has had strong a correlation with Japanese equities in recent months.

“The report also suggested Abe is likely to proceed with the planned sales tax hike. So those who had sold the dollar/yen on worries he may backtrack on the tax hike were buying back,” said a trader at a Japanese bank.

Still, some traders said the reaction in the markets to the report would likely be temporary.

“At this point of time when nothing has been decided yet, how much can markets price in (the tax cut)?,” said another Japanese bank trader.

The yen hardly reacted to data showing Japanese machinery orders fell less than expected in June.

The dollar index, which measures its value against a basket of six major currencies, ticked up slightly to at 81.447 .DXY, pulling away further from Thursday’s seven-week low of 80.868.

The dollar’s overnight gains appeared linked to anticipation that strong U.S. data will prompt the Federal Reserve to act sooner rather than later to trim its monthly purchase of about $85 billion in bonds. To that extent, the next real test for the dollar is Tuesday’s retail sales reading. &lt-ECI/US&gt-

Some traders believe the greenback has been mostly pushed up by flows in thin trade due to the summer lull in the absence of major economic data.

Economists polled by Reuters forecast retail sales likely grew 0.3 percent in July after a 0.4 percent increase in June.

As the dollar bounced back, the euro slipped to $1.3291.

The single currency was also under pressure after German news magazine Der Spiegel reported on Sunday the Bundesbank was warning Greece would need more financial assistance by early next year.

Data on Monday showed the Greek economy, which was facing its sixth consecutive year of recession in 2013, had shrunk 4.6 percent in the second quarter, though economists said the figures may show that the worst of the recession may be over.

The broad U.S. dollar recovery pushed the Australian dollar down slightly to $0.9127, about a full cent from a two-week high of $0.9221 touched on Monday.

The Aussie has strong resistance near $0.9300-9350, which proved a stubborn cap from late June through July.

(Reporting by Hideyuki Sano- Editing by Shri Navaratnam)