LONDON: The yen dropped to one-month lows against the dollar and the euro on Wednesday, as speculators and investors took data showing Japan had logged its first annual trade deficit since 1980 as a cue to unwind bullish bets in the Japanese currency.
The euro inched up against the dollar with the focus now on the Federal Reserve. The US central bank is expected to begin a new practice of announcing policymakers' interest rate projections when a two-day meeting ends later on Wednesday.
Economists polled by Reuters expect the Fed will signal that it is unlikely to start hiking interest rates until the first half of 2014, more than five years after chopping them to near zero. Any surprise on the dovish side could see the dollar come under pressure against the euro and the yen, analysts said.
"US yields have pushed up in recent days and if data there continues to improve we would see the dollar supported," said Geoff Kendrick, currency strategist at Nomura.
"But the risk is the Fed could be more dovish than what the market is expecting in which case you might see the dollar pull back. In any case, I do not see dollar rising to 80 yen."
The dollar reached as high as 78.009 yen on trading platform EBS, its highest level since late December. Selling in the yen picked up after Japan logged an annual trade deficit in 2011 for the first time in over 30 years.
Traders cited offers from Japanese exporters above 78 yen although many expect selling in the Japanese currency to gather pace on steady unwinding of yen long positions placed by speculators, with model and macro funds also looking to sell.
Still, Takuji Okubo, chief economist at Societe Generale in Tokyo, was sceptical that the trade deficit would have a lasting impact on the yen.
"Japan's current account balance is still in surplus, as the income from Japan's vast foreign assets, both direct investment as well as its security investments, is more than offsetting the deficit from trade. In addition, capital flows are much more important for the yen than trade flows," Okubo said.
Chartists said the dollar would have to battle a wall of resistance posed by the 200-day moving average at 78.35 yen and the 61.8 percent retracement of the October-January fall at 78.31.
EURO STEADY
The broad weakness in the yen saw the euro hit a four-week peak of 101.64 yen. The pair was trading above 109 yen as recently as November, before falling to an 11-year low of 97.04 on Jan. 16.
Many Japanese exporters set their euro rate targets at 105 yen, so the pair would run into heavy selling pressure ahead of that level, traders said.
The euro was supported ahead of the US Federal Reserve and German IFO data. The key German indicator is likely to show marginal improvement in economic expectations and business climate.
The common currency has fared reasonably well against the dollar in recent sessions, benefitting from a squeeze in extreme short positions. A decline in funding costs for Spain and Italy and recent data that have showed a surprising strength in manufacturing and services this month have also lent support.
Portugal also eased market jitters after its prime minister said the country was not seeking to renegotiate or extend its 78 billion euros bailout from its creditors.
The single currency fetched $1.3034, marginally higher from late New York levels and not far off a three-week peak of $1.3063 struck on Tuesday.
However, with no definite outcome on Greece's debt swap talks and the threat of the country's ratings being cut to 'selective default' by Standard & Poor's, the euro's outlook remains uncertain.
The Australian dollar gained 0.4 percent to $1.0518 , coming close to a three-month peak of $1.0574 set earlier in the week bolstered by improved risk appetite and a higher-than-expected reading of underlying inflation.
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