GMA welcomes greater global role for Japan

TOKYO (AFP) - The dollar dipped against the yen in Asian trade Thursday after former Federal Reserve chief Alan Greenspan spooked markets with a warning of a possible sharp correction in Chinese shares, dealers said.

The dollar eased to 121.52 yen in Tokyo morning trade from 121.66 in New York late Wednesday.

The euro slipped to 1.3455 dollars from 1.3459 and to 163.47 yen after 163.75.

Financial markets were rattled by reported remarks from Greenspan warning of a possible "dramatic contraction" in Chinese share prices, whose recent gains he said were "unsustainable."

Market players were keeping a nervous watch on Chinese stocks following the remarks although the benchmark Shanghai composite index opened higher as investors there appeared to shrug off the remarks.

"Although we don't expect shares to plunge, we are still concerned of what might follow in the coming weeks," said Yoshifumi Suzuki, forex dealer at Hachijuni Bank in Tokyo.

China meanwhile assured the United States at the end of high-level talks Wednesday that it would allow greater flexibility of its yuan currency but the remarks had little impact on the market, dealers said.

Investors are concerned about a possible repeat of the global market turmoil seen in February which began with a stock market sell-off in China that prompted speculators to reverse so-called carry trades funded with cheap Japanese yen, dealers said.

That rout which triggered a fall in the dollar as investors scaled back risker investments was blamed partly on a warning from Greenspan about US economic growth.

"The sudden plunge in global markets caused the yen carry trade to unwind rapidly. Investors are worried this could happen again and so we are very attentive," Suzuki said.

"If Chinese shares fall, this could pull down Japanese shares and could influence the unwinding of the yen carry trade," he added.

Market participants were also focusing on hawkish minutes from Bank of England policymakers from their meeting earlier this month when they mulled raising interest rates by a larger-than-expected half a point to 5.75 percent to curb inflation.

The minutes raised expectations of another rise in British interest rates in the coming months, dealers said.

The British pound was steady at 1.9860 dollars from 1.9863 in New York late Wednesday.

In a week thin on the economic calendar, dealers were waiting for Friday's US housing data and Japanese consumer price index (CPI) which are expected to show a third straight monthly fall.

If the CPI is weaker-than-expected, "the market will be more convinced that the Bank of Japan will hold interest rates until after the Upper House election in July," argued Toru Umemoto, chief forex strategist at Barclays Capital.