TOKYO/SYDNEY: The listless yen bounced back a tad from a 2 1/2-year low against the dollar on Monday as option-related buying prompted short-term players to give up a further test of the yen downside for now.
But it still faced the nagging problem of being the currency of choice to sell, with the Bank of Japan seen under the most pressure among major central banks to ease policy aggressively.
"Now that Japanese policymakers set a two-percent inflation target, they can't stop monetary easing even if the yen falls to around 100 yen per dollar because inflation will be nowhere near two percent in the near future," said Mitsuru Saito, chief economist at Tokai Tokyo Securities.
The dollar bought 92.65 yen, down 0.2 percent from late US trade on Friday. But it was not far from a 2-1/2 year high of 92.97 on Friday.
An attempt early on Monday to test 93 yen was hampered by dollar selling to hedge option barriers. Still, many traders see it on track to retest 95.00, a level at which it was capped in 2010.
The euro also extended its rally to 126.97 on Friday, nearing its 2010 peak of 127.46. It was last at 126.19 yen, 0.3 percent below late US trade. Only five weeks into the year and the common currency is already up around 10 percent against the yen. The dollar is nearly 7 percent higher, following a rise of about 13 percent for 2012.
"The Japanese authorities have committed themselves to a 2 percent inflation target, but the market perceptions about economic growth and inflation expectations remain subdued," analysts at Barclays Capital wrote in a note.
"We therefore believe that the authorities will continue to use the JPY as a tool to boost actual inflation, thus helping to validate the new 2 percent target."
Data last Friday showed currency speculators added bearish bets on the yen, while trimming bets against the greenback.
Among the G3 currencies, the euro has been the standout performer, having notched up gains of 3.5 percent on the greenback so far in 2013 as well.
It was last at $1.3627 down slightly from late US levels after climbing as high as $1.3710 on Friday, a level not seen since late 2011.
Data last Friday showing euro zone factories had their best month in nearly a year during January underscored optimism for the euro.
US jobs data was mixed with employment growing modestly in January. Encouragingly, job gains in the previous two months were larger than first reported.
Part of the reason for the euro's outperformance is the European Central Bank's relatively upbeat view on the euro zone economy. Yet the strength of the currency is sure to sit uncomfortably with the ECB, which will be able to make a clear statement on the currency at Thursday's meeting.
Still, any attempts by ECB President Mario Draghi to talk down the euro will likely only have a temporary effect, analysts said.
The Bank of England also meets Thursday and should maintain a dovish tone. This will give no reprieve to sterling, which has slumped to 15-month lows on the euro. The common currency bought 86.91 pence, having risen as high as 87.16 pence.
Against the dollar, the British unit is also dangling just above five-month low hit a week ago of $1.5674, trading at $1.5698.
Commodity currencies have somewhat faded into the background, although the New Zealand dollar has been quietly grinding higher thanks to recent hawkish-sounding comments from the Reserve Bank of New Zealand.
The kiwi drifted up to a 16-month high on the greenback at $0.8493 and hit a 2-1/2 year peak on the Australian dollar, which slid to NZ$1.2274.
The Aussie is set to remain on the back foot with the Reserve Bank of Australia (RBA) likely to keep the door open to more rate cuts this week.
While the RBA is not expected to ease at its first meeting of the year on Tuesday, analysts expect it will eventually be forced to do so later in the year, given the number of economic sectors struggling with the strong currency.