NEW YORK: The yen jumped to a one-month high against the dollar on Tuesday after the Bank of Japan refrained from loosening monetary policy further and concerns about the finances of Spain and Italy drove a bid for safety.
The yen's gains, however, could be capped by speculation of further monetary stimulus from the BoJ when it issues new forecasts on the economy on April 27.
Investors moved into safe-haven assets like the yen, German bunds and US Treasuries after a jump in Italian and Spanish bond yields added to debt and growth concerns in the euro zone.
"Price action today is a combination of a risk-off environment and also the non-action from the BoJ," said Daniel Hwang, senior currency strategist at Forex.com in New York.
"Spain is a big focus right now and even Greece will be coming back into the picture as it looks for another tranche of aid, so this euro zone debt tragedy is not going away, but seems to be getting worse."
The dollar hit a low of 80.81 yen, its lowest since early March and last traded at 80.88, down 0.8 percent on the day, according to Reuters data.
Technical support lies at 80.81, which is not only the 50 day moving average but the 38.2 percent retracement of its rally from Oct. 31, 2011 until March of this year.
"The move in the yen suggests participants had expected easing from the BoJ," said Camilla Sutton, chief currency strategist at Scotia Capital in Toronto. "It is not off the table, however, and the BoJ may choose to ease policy at its meeting later this month."
A break below 80.81 could open a test down to 79.80, Sutton said.
The yen also rose to an over one-month peak versus the euro at 105.57. The euro last traded at 105.68, down 1.1 percent, with the shared currency vulnerable to a resurgence of concern over sovereign debt.
Barclays expects the Bank of Japan to extend its asset purchase program, currently set to reach its limit at the end of the year, at the end of the April or before the middle of the year.
"As such, it would amount to an increase in the capacity for future easing, though perhaps not with an immediate easing effect."
By flooding markets with liquidity, asset purchase programs, or quantitative easing, are tantamount to printing money and diminish a currency's value.
Dollar/yen direction will likely be dictated by Treasury yields, which surged last month on tentative hopes of improving US growth and after a surprise easing of monetary policy by the BoJ in February.
SPANISH, ITALIAN YIELDS RISE
The euro last traded down 0.3 percent versus the dollar to $1.3066, within sight of a one-month low of $1.3033 hit on Monday. Stop loss selling was reported around $1.3090 and market players cited more stops below $1.3064.
Spanish bonds have come under pressure recently as investors worry Spain could become the next source of contagion in the euro zone due to its weak fiscal position.
Better-than-expected German trade data failed to provide the euro with much support as investors remained focused on underperformance in the periphery.
"The market is looking at Europe and saying there is a recession in some economies. Germany is doing quite well but is being dragged down by the others," said Gavin Friend, currency analyst at National Australia Bank.
"Euro/dollar looks to be moving down through $1.30 and I think it will be in a new $1.29 to $1.3250 range."
Uncertainly about the prospects for the euro has fallen somewhat as reflected in the options market, with three-month risk reversals in the euro/dollar still biased for euro puts, trading at -2.3 vols on Tuesday, but improving from -3.5 vols in mid-February.
Euro/yen three-month risk reversals remained biased for euro puts, trading at -3.45 vols, but that is down from -3.68 vols in early March.
Comments
Comments are closed for this article.