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Dollar-yen dragged around by Nikkei, Aussie stuck in the crosshairs

imageTOKYO/SYDNEY: The dollar inched up against the yen on Thursday morning as it continued to shadow the Japanese stock market, where a rout on Wednesday had put the greenback under pressure before disappointing US data sealed a 1 percent drop.

The greenback was pulled up 0.1 percent to 99.15 yen by a brief kick-up in the Nikkei share index, which yen traders are now watching closely as foreign investors wind back the hedges they had put on for protection from the yen's slide.

The Nikkei was last trading up 0.1 percent in a choppy market.

"Even if the Japanese stock market goes back up it will likely stay volatile and that will make the yen hard to sell, regardless of whether the market is bullish on the dollar," said Masashi Murata, senior currency strategist at Brown Brothers Harriman.

On Wednesday, a closely watched report showed hiring by US firms was sluggish in May, raising the risk that Friday's non-farm payrolls could disappoint, thereby lessening the possibility that the Federal Reserve will taper its easing programme early.

"US data might be disappointing but so far the direction of the economy hasn't changed- people aren't exactly worried about another recession. I therefore think 98 could be an appropriate level for the dollar-yen going into next week," Murata said.

The dollar had renewed its June 3 one-month low of 98.96 yen earlier in the session.

After disappointment that Japanese Prime Minister Shinzo Abe did not announce new bold steps to stimulate the economy in Wednesday's speech, investors were given another incentive to unwind extremely bearish positions in the yen on data showing Japanese investors were net sellers of foreign bonds for the third straight week to June 1.

The euro also edged up 0.1 percent to 129.85 after suffering a similar-sized decline as the dollar against the Japanese currency on Wednesday.

The common currency was flat against the greenback after rising to an almost-one month high of $1.3118 in the previous session ahead of the European Central Bank's policy meeting later on Thursday, where it is likely to hold off fresh action.

"We see little scope for major policy developments and thus expect the euro to stay in its narrow range," said Chris Walker, analyst at Barclays Capital.

Immediate resistance is seen around $1.3140, a level representing the 76.4 percent retracement of its May 1-17 fall.

"Although the euro has largely been immune to surprises in data releases, we expect two factors to change this. First, relative rates should eventually drive EUR/USD lower. Second, the concept of negative rates provides Mr Draghi with a tool for verbal intervention."

The yen's resurgence continued to batter the commodity currencies, with the Australian dollar extending losses to lose a further 0.8 percent on Thursday to a three month low of 93.73 yen. Against the dollar, the Aussie tumbled 0.9 percent to $0.9449, breaking through stop-loss orders cited by analysts at $0.9450. It is now on track to test its 2011 trough of $0.9388.

It even gave up 0.2 percent against the New Zealand dollar , a decline traders say is the ultimate bearish signal, although it held above a 4-1/2 year low of 1.1811 hit on May 29.

The Aussie has come under renewed pressure after data on Wednesday showed the economy grew by a weaker-than-expected 0.6 percent in the first quarter.

Markets have since shortened the odds of another interest rate cut with debt futures giving a near one-in-two chance of a July rate cut.

"For the RBA to completely discount a further rate cut, the Aussie would need to drop to $0.90 or 90 yen, which I think would be difficult... it's a race to see which would happen first," said Murata of Brown Brothers Harriman.

Copyright Reuters, 2013