The yen neared a record peak against the dollar today, but analysts say expectations Japan will intervene to weaken the currency if it gets much stronger may provide a good opportunity to buy the greenback.
The yen has attracted steady buyers since last week's massive earthquake and tsunami hit Japan, with traders bracing for investors and insurers to sell their overseas assets to pay for repairs and claims at home.
The dollar fell to a four-month low of 80.45 yen, and BNP Paribas technical strategist Andrew Chaveriat said a break of the November low of 80.25 and then 80 could put the record low of 79.75 within reach, followed by a move to 77.05.
"The daily momentum is a bit oversold but not as much as in October," he said. "And the weekly momentum is more powerful than during the October decline and a lot less oversold."
Market participants, however, expect Japan to try to lean against such a move by selling yen in the open market and driving the dollar higher. A stronger yen would make Japanese products less competitive and put further pressure on the fragile economy, mired in a decades-long bout of deflation.
"If you get short yen around here before it hits 80 per dollar, that's a really good trade," said Greg Salvaggio, vice president of trading at Tempus Consulting in Washington.
He said Japanese authorities are likely to intervene if the currency breaks below 80 and will probably have the blessing of other central banks, given the circumstances.
"Excellent levels to buy the dollar against the yen are imminent," said Ken Dickson, investment director of currencies at Standard Life Investments. "These levels are attractive as we are not convinced repatriation will strengthen the yen further."
Unease about the earthquake's impact on world growth and unrest in the Middle East also boosted the Swiss franc, a traditional safe haven currency, which hit a record high against the US dollar and was firmer against the euro.
Paresh Upadhyaya, head of Americas G10 FX strategy at BofA Merrill Lynch, said the dollar may yet lurch lower against the yen as the market tests stop-loss orders said to be layered below 80.
But he said a disorderly move would almost certainly bring in Japanese authorities and present "really good levels to get long dollar for move back to around 90 yen by year end."
He said the damage to Japan's economy and increased need for oil imports following problems at several nuclear reactors will chip away at Japan's trade and current account surplus, two factors that have contributed to yen strength in 2010.
Also, expectations that the Federal Reserve will start to signal a move toward tighter monetary policy later this year will shift make dollar assets more attractive, he said.
Yesterday, the Fed said higher commodity prices were putting upward pressure on inflation, though it called those pressures transitory and did not change its economic outlook.
Against the dollar, the euro slipped 0.4 per cent to $1.3945 after failing to break above a recent four-month high of $1.4036. Traders said sell orders were clustered above $1.40.
European Central Bank governing council member Christian Noyer today said the central bank will weigh the impact of Japan's crisis on policy decisions, clouding speculation the ECB will raise interest rates next month.
The head of the euro zone debt rescue fund also said it was impossible to say if Greece will have to restructure its debts, which, along with a Moody's downgrade of Portugal's sovereign rating kept investors negative on the euro.
Reuters