By: Hillel Fuld
The JPY made a comeback from a 15-year peak on the USD and a nine-year high on the EUR on Wednesday due to chances that Japanese authorities may indeed take steps such as yen-selling intervention to encourage the yen's rise.
The caution initially originated from a Nikkei business daily report saying Japan's Ministry of Finance may consider one sided yen-selling market intervention if speculators drive up the currency.
Finance Minister Yoshihiko Noda confirmed that view, telling reporters on Wednesday that recent yen moves were one-sided and Tokyo will respond appropriately when the time is right.
The yen's surge has also nudged up the previously negligible chances of monetary easing by the Bank of Japan before its Sept. 6-7 rate review, sources told Reuters. The most likely result would be to expand the amount or extend the duration of a short-term funding operation.
Japanese Prime Minister Naoto Kan said he feels a sense of crisis over the strong yen and wants to show a firm response soon, Jiji news agency reported on Wednesday.
"Combining the Nikkei's report, and comments from the prime minister and finance minister, the market view on the possibility of Japan's intervention if the yen appreciates further has been raised," said Tomohiro Nishida, treasury department manager at Chuo Mitsui Trust and Banking.
"But it's a question of whether Japan will intervene at the current forex level."
The USD rose 0.7 percent versus the JPY to 84.45 YEN on short-covering, having pulled up from a 15-year low of 83.58 yen hit on trading platform EBS on Tuesday. There was also some discussion of dollar-buying by Japanese importers.
Traders stated, however, that the dollar's gains were likely to be limited with selling interest seen likely to emerge if it rises toward 85.00 yen.
Some were skeptical about just how effective any intervention by Japan alone would be in the long run.
"The bottom line is that it will be difficult to reverse the yen's firm trend completely even with monetary easing by the BOJ, which the market has priced in, along with solo intervention by Japan," said Jun Kato, senior manager of investment at Shinkin Asset Management.
"Such moves by the Japanese authorities might weaken the yen temporarily but there are market players who are waiting to sell the dollar on its rise. There's a possibility the yen may strengthen even more."
Traders said the dollar's decrease could strengthen if it drops below 83.50 yen, at which the greenback had strong support in June 1995 after hitting its all-time low of 79.75 yen in April of that year. There is talk of option barriers on the downside at levels such as 83.00 yen, they said.
The EUR climbed 0.9 percent to 106.97 yen after hitting a nine-year low of 105.44 yen on EBS on Tuesday.
But the market mood is still one of yen buying as the latest dismal U.S. home sales data and a renewed slide in stocks has sent investors scrambling for safe-havens.
Traders were also closely monitoring how far the Nikkei average will fall, calculating that the more significant its losses the more possible it is that Japanese authorities might finally bite the bullet and intervene.
The euro's upside was limited after Standard & Poor's downgraded Ireland to AA- and warned the outlook was still dismal, fanning worries about euro zone sovereign debt and the banking system.
The EUR inched up 0.3 percent to $1.2664 after touching a 6-week low of $1.2588 on EBS on Tuesday.
The single currency fared less well against the Swiss franc, collapsing to a record low around 1.3015 francs before edging back to 1.3050 francs.
"The overnight session was characterised by a rather sharp round of risk aversion that started late yesterday, gained momentum during the European session and became entrenched following shockingly soft U.S. data," analysts at RBC Capital Markets said in a note.
"The yen and Swiss franc were the undisputed winners, with the Aussie and Canadian dollars making up the rear."
A 27 percent drop in existing U.S. home sales caused much of the damage, knocking the S&P 500 .SPX down 1.5 percent and sending Treasury yields to new lows .
The data was so poor it sparked talk that the Federal Reserve could embark on a fresh round of quantitative easing, which seemed to tarnish the U.S. dollar's claim to be a safe haven.