FOREX-Dollar soars as Japan steps in to weaken yen

Published 09/15/2010, 10:16 AM
Updated 09/15/2010, 10:20 AM
EUR/JPY
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AUD/JPY
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* Japan intervenes for first time in six years

* Officials say intervention may continue in New York time

* Dollar rises to 85.77 yen, runs into strong offers

* Key resistance above 86 yen still untested

(Updates throughout, adds comment, changes byline, dateline, previous LONDON)

By Steven C. Johnson

NEW YORK, Sept 15 (Reuters) - The dollar rose more than 3 percent against the yen on Wednesday as Japan intervened to weaken its currency for the first time in six years, but traders said Japan may struggle to keep the yen weak for long.

The dollar rose to 85.72 yen from its 15-year low beneath 83 yen, its biggest daily gain in nearly two years. It was last up 3.1 percent at 85.60 yen.

The euro, sterling and Australian dollar also rose against the yen as a result of the Japanese intervention, which the Ministry of Finance said was carried out without foreign help.

The timing caught markets off guard, coming after Prime Minister Naoto Kan won a party leadership election over a challenger who was a more strident advocate of intervention. A weaker yen should aid exporters and help combat deflation.

"It's been six years since they intervened and I thought there'd have to be more pain, but I guess there was enough suffering for the exporters to go around," said Fabian Eliasson, vice president of currency sales at Mizuho Corporate Bank in New York.

And there could be more to come, with a senior government official saying Japan could intervene again in New York hours if needed. [ID:nLDE68E1E2]

"I think we're now going to see persistent official buying of dollar/yen in the near-term," said Adam Cole, head of currency strategy at RBC Capital Markets.

The Bank of Japan started buying the dollar at around 0130 GMT on Wednesday. [ID:nTOE68E02W]

Sources familiar with the matter said the BOJ was ready to leave the intervention unsterilized rather than drain the funds that went into the currency market, as such an approach would be more likely to keep the yen weak.[ID:nTKX006996]

AN UPHILL BATTLE

Billionaire financier George Soros told Reuters Insider on Wednesday that Japan was right to weaken the yen, but currency analysts said authorities would struggle to keep the yen weak, particularly if markets suspect the Federal Reserve decides to pump more money into the U.S. economy this year to prevent a faltering economic recovery from stalling. [ID:nWEN9786]

Recent signs of weakness in the U.S. economy have narrowed the gap between U.S. and Japanese bond yields, prompting investors to ditch dollar-denominated assets and buy yen.

"Until we see something improve in the U.S., that doesn't change," Eliasson said. "With more potential for dollars to be pumped into the market, that should weaken the dollar."

New York traders said the pair would remain in a downtrend until it tests the 86.70 area, which marks the 38.2 percent retracement of its decline from near 93 yen in June to a 15-year low around 82.85. Stop-losses were seen at 85.75 yen.

Dealers suggested Wednesday's intervention amounted to about 300-500 billion yen ($3.6 billion-$6 billion), though some Japanese media cited market sources saying the amount was closer to 1 trillion yen. [ID:nTOE68E02W]

A 15-month Japanese intervention campaign that ended in 2004 cost about 35 trillion yen and achieved mixed results.

POSITIONING COULD HELP BOJ FOR NOW

Some strategists said large speculative positions in favor of the yen could aid Japan's efforts as such market participants are forced to cover dollar shorts. [IMM/FX]

"Speculators have been long of yen so there is scope for further yen selling. But there's scepticism over whether the Japanese can change the trend as fundamentals haven't altered," said Beat Siegenthaler, FX strategist at UBS.

But CitiFX strategists suggested staying short yen and using dips in the dollar as buying opportunities.

"Obviously, it will take more than a couple big figure rally to drive a big shift in positioning, but on the above basis it does not look as if the initial rally is yet stretched," they wrote in a note to clients.

The euro also rose 3.1 percent to 111.17 yen , on track for its best day since February 2009. Support was seen around 111.01. The Australian dollar rose 2.7 percent to 80.18 yen . The euro fell 0.1 percent to $1.2980 .

For dollar/yen correlations: http://link.reuters.com/wyn43p

For PDF on the yen's rise http://r.reuters.com/zuz33p

For graphic on intervention http://link.reuters.com/qep63p

For Reuters Insider on yen http://link.reuters.com/sav63p

and http://link.reuters.com/peb53p

For Breakingviews on BOJ intervention [ID:nLDE68E0JD]

(Additional reporting by Gertrude Chavez-Dreyfuss and Vivianne Rodrigues in New York and Jessica Mortimer in London; Editing by )

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