June 24 (Bloomberg) -- The yen fell against the dollar and euro on speculation record prices for crude oil will hamper the Japanese economy's recovery from recession.

The yen is down against 16 major currencies, including the British pound, Swiss franc and Canadian dollar after oil for August delivery rose to $60 a barrel for the second day today. Japan imports almost all its oil.

``The main driver of the yen is these high oil prices,'' said Mitul Kotecha, head of currency strategy in London at Calyon, the securities unit of Credit Agricole SA. ``With oil prices touching $60 a barrel then this is going to have a significant negative effect on an economy that imports most of its oil.''

Against the dollar, the yen fell to 109.23 at 10:45 a.m. in London from 108.92, late in New York yesterday, according to electronic foreign exchange trading system EBS. Japan's currency also weakened to 131.72 per euro from 131.14.

The dollar fell against the euro after failing to sustain a rally beyond $1.20, a level unseen since August.

``There's a huge amount of resistance and it looks like the traders have got frustrated in their attempts to take the euro lower,'' said Neil Mellor, a currency strategist at Bank of New York in London. ``Even though there are a lot of negative factors hitting Europe, there's now a tendency for the market to take a breather.''

Assault on $1.20

The euro is being buffeted by speculation the European Central Bank will respond to a stagnating economy by reducing its benchmark rate for the first time since 2003. The Federal Reserve will raise its target rate for the ninth time in a year on June 30, according to most economists polled by Bloomberg.

``We've had a rejection of this $1.1980 level, so I think we're in a range-bound environment and wouldn't bet on a significant fall from this level,'' said Steve Saywell, chief currency strategist at Citigroup Inc. in London. ``If we go through $1.1935 level then all bets are off as there'd then be a good risk of the dollar advancing further.''

Japanese Finance Minister Sadakazu Tanigaki said today that the government must closely watch the impact on the economy of higher oil prices. The yen had its biggest drop in more than a week on June 22 after a government report showed the trade surplus shrank by the most in three years Record oil prices increased import costs and export growth slowed.

``Rising oil prices are hurting the yen by contributing to a decline in the trade surplus,'' said Kenichiro Ikezawa, who manages $1 billion in overseas debt at Daiwa SB Investments in Tokyo. ``That means less demand for the yen.''

Interest Rates

The euro is heading for the third weekly decline in four on expectations the interest rate gap between Europe and the U.S. will widen. Sweden's Riksbank on June 21 reduced its benchmark rate to a record and minutes from the Bank of England's policy meeting this month showed two officials voted for a rate cut.

``A break of $1.20 today won't be the end of a weaker euro,'' said Satoru Ogasawara, a currency strategist in Tokyo at Credit Suisse First Boston. ``Speculation of an ECB rate cut is weighing on the euro. The trend still looks to be for it to weaken,'' to $1.15 in three months, he said.

The spread between two-year U.S. Treasury notes and similar- maturity German bonds increased to 160 basis points from 158 yesterday. On June 21, the gap widened to 166 basis points, the most since 2000. A basis point is 0.01 percentage point.

Fed policy makers will raise their target rate for overnight loans between banks by a quarter point to 3.25 percent on June 30, according to the median forecast of economists surveyed by Bloomberg News. The increase would be the ninth in a year. The ECB has kept its rate at 2 percent since June 2003.

U.S. orders for durable goods probably rose for a second month in May, a report today will probably show. Orders may have gained 1.5 percent after rising 1.9 percent in April, based on the median of 64 forecasts in a Bloomberg News survey.

To contact the reporter on this story: Jake Lee in London at Jlee127@bloomberg.net.

Last Updated: June 24, 2005 05:49 EDT