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The U.S. dollar is likely to be firm against the yen in Tokyo next week as uncertainty over Japan’s politics and economy continues to restrain the currency, dealers said.

“The fact remains that there is still no good news coming out of Japan. The dollar will be well supported,” said Kimihiko Tomita, head of foreign exchange sales at Chase Manhattan Bank in Tokyo. Many dealers said they expect the dollar to move between 121 yen and 125 yen.

The dollar rose to the week’s high of 124.80 yen last Monday but fell to 121.10 yen Friday, its lowest level in Tokyo since mid-March. At 5 p.m. Friday, the U.S. currency fetched 121.92-95 yen compared with 124.23-26 the same time the week before.

Dealers said they will be keeping an eye on the Liberal Democratic Party’s presidential election on Tuesday. A dealer at Aozora Bank said the dollar could fall if Junichiro Koizumi, an outspoken advocate of structural reform, wins the race. “The yen will be supported on hopes that he would be capable of bold changes,” he said.

This week, the dollar started on a firm tone following the release the previous Friday of a government report downgrading its assessment of overall domestic economic activity for the third consecutive month.

The U.S. currency weakened to the 122 yen level Wednesday as a wave of dollar selling was triggered by a surge in Tokyo stock prices. On Thursday, the U.S. currency temporarily dipped below 122 yen for the first time in three weeks following the surprise U.S. interest rate cut implemented Wednesday. The U.S. Federal Reserve slashed the federal funds target rate and the official discount rate by half a percentage point to 4.5 percent and 4.0 percent respectively.

After touching 121.10 yen Friday morning, however, the dollar recovered ground, temporarily rising to the 122 yen level.

Tomita said, however, that he expects dollar-yen trading to be contained in a tight range. “I don’t think there are going to be any big moves whoever wins the race. We will need time to gauge whether the proposed policies are going to work,” he said.

Some dealers said the dollar’s rise against the yen could be limited ahead of the meeting of the finance ministers and central bank governors of the Group of Seven (G7) countries to be held at the weekend.

“The Japanese financial authorities will not want the yen to become too weak ahead of the G7,” said a dealer at Sakura Bank.

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