May 26 (Bloomberg) -- The yen dropped against the euro for a sixth day in seven in European trading, and fell versus the dollar, as an earthquake which shook Tokyo prompted investors to sell the Japanese currency.

The yen was at 138.59 yen per euro at 1 p.m. in London, from 138.05 late Friday. Against the dollar, it was at 117.33 yen from 116.99 yen. Trading may be less than usual because the London and New York markets are closed for a public holiday, analysts said.

``The Japanese have got extreme difficulties in growing, and this is not helping'' the currency, said Bernard Walschots, an economist at Rabobank Nederland in the Dutch city of Utrecht. ``Perhaps it's early days but any destruction of human and physical capital is very bad for the economy.''

A wide area of Japan was shaken by an earthquake centered in the northern part of the main Japanese island of Honshu that measured magnitude seven on the Japanese version of the Richter scale, according to NHK news. The force of the earthquake shook office buildings in Japan's capital Tokyo. Some mobile phone services were disrupted and train services were halted.

``The yen sale was triggered by a news of the earthquake in Japan,'' said Kazuhiro Takeuchi, senior manager of the trading group at Mizuho Corporate Bank in Hong Kong.

``As long as this doesn't create sizable damage to Japan's whole economy, the impact should be short lived. The basic bias is still for the dollar to weaken.'' The dollar may fall to as little as 115 yen in a week or so, he said.

Rates

The European currency is also being supported by the higher key interest rate in the 12-country region that uses the euro, analysts said. Even with an expected cut from the central bank next month, rates will remain higher than in the U.S. and Japan, helping deprive the U.S. of the $1.5 billion a day that analysts estimate it needs to attract to fund the current account deficit.

``The euro is still on its way up,'' said Gregor Beckmann, an economist at HSBC Trinkaus & Burkhardt KgaA in Dusseldorf. The euro probably will be at $1.27 ``toward the end of the year,'' he said. He sees rates being reduced 50 basis points to 2 percent when policy makers meet June 5.

Twenty-one of 30 traders, analysts and investors surveyed on Friday recommended buying Europe's common currency versus the dollar. The U.S. currency last week accelerated declines after Treasury Secretary John Snow suggested U.S. officials are content to see the currency weaken to spur exports.

UBS Warburg LLC, the biggest trader in the $1.2 trillion-a- day currency market, according to Euromoney magazine, and a survey participant, last week lowered its dollar forecast, calling for the currency to slide to $1.25 per euro by the end of the year, rather than $1.20.

``Europe's economic situation is not strong and that will give traders a good excuse to sell back the euro in the short term,'' said Noriyoshi Tsunoda, a trader in the treasury department at Mizuho Corporate Bank in Taipei. ``This will put short-term pressure on the currency'' and push the euro as low as $1.1590 this week, he said.

Last Updated: May 26, 2003 08:07 EDT