NEW YORK: The yen tumbled to multimonth lows against the dollar and euro on Friday after reports that importers in Japan had sold the yen and key technical levels were breached.
The Japanese currency has been on a downward trajectory for over a week amid monetary easing by the Bank of Japan, the country's shrinking current account surplus, interest rate differentials with the United States and rising crude oil prices.
Meanwhile, the euro hit new highs against the dollar and yen as investors sought to cover positions widely deemed as overstretched at the short end.
"The move in both the euro and yen right now is more a positioning squeeze than anything else," said Greg Anderson, G10 strategist at CitiFX, a division of Citigroup, in New York.
"People were using euro shorts to fund long positioning in the Australian and Canadian dollars and now we are seeing those positions get unwound," he said. "Not much has changed on the news front, but the break of critical moving averages has caused some powerful cleansing of crosses."
Policymakers from the Group of 20 leading economies will meet in Mexico City this weekend, a meeting seen dominated by the euro zone debt crisis, although officials also have the global economic outlook on the agenda.
"Squeezes almost always bite the hardest on Friday and today comes before the weekend's G20 meeting," Anderson noted.
The dollar hit a fresh 7-1/2-month high at 80.91 yen and last traded at 80.88, up 1.1 percent on the day, pulling further away from the 2012 low of 76.03 hit on Feb. 1, according to Reuters data.
Anderson said the he expects the yen's drop to reverse and expects a new floor to be set at 78.00 or 79.00.
Short-term players triggered weak stop-loss orders above Wednesday's peak of 80.41, helping the dollar break above a major chart resistance point of 80.42 yen, which is the 50 percent retracement of its fall from the 2011 high around 85.50 yen to the all-time low of 75.31 yen.
The euro rose to a fresh 3-1/2-month high of 108.95 yen , well above this year's low of 97.04 yen hit on Jan. 16. It last traded at 108.94, up 1.8 percent on the day.
Dollar/yen traditionally has a strong correlation with short-term Japanese-US yield spreads. US Treasury yields are not expected to rise much further due to the Federal Reserve's pledge to keep rates exceptionally low until at least 2014, while Japanese 2-year government bonds are already extremely low.
EURO RALLIES VS DOLLAR
Against the dollar, the euro extended hefty gains made a day earlier after an improved German Ifo business sentiment survey triggered a short-covering rally, where players give up on bets that the currency will weaken.
The euro was last up 0.7 percent on the day at $1.3464, off an earlier peak of $1.3475, which was a fresh 2-1/2-month high.
Market players said the euro rally had good momentum after it broke through the 100-day moving average around $1.3306 on Thursday, and took out a reported option barrier at $1.34 in early European trade on Friday.
Given the size and speed of the current move, it is tempting to search for a macro explanation, according to Jens Nordvig, global head of foreign exchange strategy at Nomura Securities in New York.
"There has been some gradual improvement in euro zone risk premia over the last several weeks, and this is playing a role," he said. "But at the same time, we note that the last few days move higher in EUR/USD (and in USD/JPY) has happened somewhat independently of other asset moves."
But the recent move in EUR/USD cannot be pinned to macroeconomic factors.
"It is a trading dynamic, not a reason to change medium-term views," Nordvig added.
Analysts said the euro's resilience was helped by better risk appetite ahead of the European Central Bank's second long-term, low-rate refinancing operation next week, while traders also reported broad dollar selling except versus the yen.
The European Central Bank needs to see the impact of its double-dose of ultra-cheap, three-year funding before taking any further policy steps and there is no need for action now, ECB Governing Council member Ewald Nowotny said on Friday.
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