LONDON: The yen briefly hit a seven-year low against the dollar in volatile trade on Monday after global rating agency Moody's cut Japan's sovereign rating, underlining the fiscal problems in the world's third largest economy.
The dollar rose as high as 119.15 yen on the EBS trading platform, its highest since July 2007, immediately after the rating decision was announced. It ran into profit-taking and was last trading at 118.48 yen, down 0.1 percent on the day.
Japanese stock futures - which tend to rise when the yen drops against the dollar and vice versa - eased after the downgrade, helping the yen to recover, traders said.
Moody's cut Japan's rating to A1 from AA3 and assigned a stable outlook to its debt. The downgrade came less than two weeks before Japanese Prime Minister Shinzo Abe seeks re-election in a snap poll where his stimulus policies and a decision to delay a second sales tax hike will be key issues.
"The yen was under pressure for most of the day so what we are seeing is a bit of a 'buy-the-rumour-sell-the-fact' reaction to the Moody's announcement," said Jeremy Stretch, CIBC World Markets' head of currency strategy in London.
"Once the knee-jerk reaction is out of the way, the downgrade underlines Japan's fiscal problems and should offer opportunities to put fresh long bets in favour of the dollar and sell the yen."
The euro also climbed against the yen to 147.70 yen . But the common currency looked likely to run out of steam against the dollar as lower commodity and oil prices added to expectations that the European Central Bank would ease policy further to combat deflationary risks.
Traders expect the ECB to lay the groundwork for further easing later this week. Final purchasing managers' index surveys from Germany and France showed that activity remained sluggish.
"Although we do not expect an announcement on quantitative easing just yet, we think President (Mario) Draghi will continue to manage expectations well, meaning that room for a euro short squeeze is likely to be limited," said ING strategist Petr Krpata.
The euro rose to a three-week high of 1.2042 Swiss francs from about 1.2018 on Friday. Investors who had bought the franc against the euro were forced to unwind those bets on Monday after the Swiss rejected in a referendum an initiative which would have forced the Swiss central bank to buy more gold.
The defeated "Save our Swiss gold" initiative would have compelled the Swiss National Bank (SNB) to boost its gold reserves to 20 percent of its assets, from about 8 percent, and stopped it from selling the metal. That would have threatened its ability to defend a 1.20 euro cap.
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