Yen gains in London

The yen rose on Friday as demand from Japanese exporters and speculators helped the currency to recoup some losses from a broad sell-off triggered the previous day by a cut to the country's credit rating. The euro was steady near a two-month high versus the dollar, and analysts said the US currency may struggle if growth data later in the day fails to change the view that Federal Reserve interest rates are set to remain at rock-bottom levels.
Analysts said the Standard and Poor's downgrade to AA- highlighted Japan's fiscal problems and could further sting the yen, which was being boosted by short-term demand and negative dollar sentiment. "From a fundamental point of view dollar/yen at 82-83 yen is too low, but short-term market forces are constantly putting a drag on," said Ulrich Leuchtmann, currency strategist at Commerzbank in Frankfurt.
"The fiscal situation is an ongoing risk for dollar/yen, and at some point it will correct significantly higher, but now is not the right time for such a move." He said speculators were taking profits on long-term positions to sell the yen. Analysts said dollar sentiment would remain sluggish in light of the US central bank's decision this week to keep monetary policy unchanged, while indicating it was in no rush to cut short its economic stimulus measures.
Investors awaited US GDP data due at 1330 GMT, which is forecast to show annualised growth of 3.5 percent in the fourth quarter, up from 2.6 percent in the third. The dollar lost 0.8 percent on the day to 82.20 yen, pulling back from a rally to 83.22 yen on Thursday. Traders said a triggering of stop-loss orders around 82.50 yen led the dollar lower. The yen also advanced against the euro and sterling.
But some in the market said investors are positioning for yen weakness in the options market, after the bias in dollar/yen risk reversals continues to creep towards yen puts - bets the yen will fall. The euro held steady against the dollar at $1.3730, just below a two-month high of $1.3760 hit on Thursday, when a warning from European Central Bank policymaker Lorenzo Bini Smaghi on imported inflation fuelled speculation of a eurozone interest rate rise. Bini Smaghi's hawkish comment added to earlier indications that the ECB will likely tighten well ahead of the Fed.
Implied interest rate futures based on overnight index swaps are fully pricing in ECB rates at 1.25 percent by October, compared with their current record low of 1.0 percent. Fed rates are not expected to rise in 2010 from 0-0.25 percent. "The euro continues to be supported by the hawkish tone coming from the ECB, with markets now pricing in more than one full 25 basis point hike by year-end," said Tom Levinson, currency strategist at ING. Broad, negative dollar sentiment kept the US currency at 77.685 versus a currency basket, hovering near 77.594 hit on Thursday, a level last seen in November.