NEW YORK: Yen rose broadly on Wednesday, erasing earlier losses triggered after the Bank of Japan eased monetary policy more than expected, as renewed concerns about the European debt crisis drove a bid for less risky currencies.
The yen hit a one-month low against the dollar as the BOJ's action, which followed in the footsteps of aggressive action by other major central banks, encouraged investors to take more risk.
The euro rose against the dollar before it succumbed to fresh profit-taking as risk aversion stemming from concerns over Spain trumped the BOJ's action.
Concerns about Spain's reluctance to seek a bailout and activate European Central Bank bond-buying weighed on risk assets on Wednesday.
Talk of a European central bank diversifying out of the euro also weighed on the single currency. The BOJ increased asset purchases by 10 trillion yen, almost double what some had expected. This followed aggressive monetary easing by the US Federal Reserve last week and a European Central Bank plan to buy unlimited amount of government bonds of indebted euro zone states.
The timing of the BoJ's move was somewhat of a surprise relative to market expectations, according to Vassili Serebriakov, currency strategist at Wells Fargo in New York.
"Markets are increasingly questioning the next European policy moves, and, in particular, the possibility of Spanish government requesting financial aid," he said.
Accommodative global monetary conditions are supportive for most commodity and emerging currencies, he said.
The dollar jumped to 79.21 yen, its highest level since Aug. 22, after the BOJ's decision. It last traded at 78.38 yen, down 0.5 percent on the day.
Analysts said a repeat of the yen's sharp fall in February-March in the wake of surprise easing by the BOJ was unlikely as both the ECB and the Fed are viewed as having eased more aggressively.
"The real test for dollar/yen is whether the current move can carry it above 80 yen," said Niels Christensen, currency strategist at Nordea in Copenhagen. "I think it will run out of steam as you need very good numbers out of the US and risk appetite to maintain pressure on the yen."
BOJ Governor Masaaki Shirakawa said Japan's economic recovery may be delayed by six months due to a prolonged slowdown in global growth.
Risk aversion abated somewhat after industry data showed the pace of US home resales rose in August to its fastest level in over two years. Government data showed groundbreaking on new homes also climbed, hopeful signs that a budding housing market recovery is gaining traction.
EURO SLIPS
The euro erased earlier gains against the yen. The single currency was last down 0.4 percent on the day at 102.38 yen, well below an earlier high of 103.63 yen.
Given that the euro had rallied some 9 percent since late July, traders said the pullback reflected mild profit-taking as markets waited to see whether Spain would apply for aid and trigger the ECB's bond-buying program.
While many market players expect Spain eventually to ask for a bailout, some say investors' patience could be tested as Madrid is likely to resist tough conditions which some northern euro zone countries would want imposed in return for any aid.
Spain's deputy prime minister, Soraya Saenz de Santamaria, said on Tuesday the government was still considering the terms of a bailout.
The euro was expected to remain broadly in favor, however, as the ECB's plans to tackle the debt crisis have encouraged investors to pare aggressive short positions.
Against the dollar, the euro last traded at $1.3064, up 0.1 percent on the day, according to Reuters data.
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