Yen retains gains as China trades unwound

A U.S. $100 dollar bill is seen December 17, 2009.

SYDNEY (Reuters) - The yen held broad gains on Wednesday while commodity currencies like the Australian and the New Zealand dollars were subdued as investors unwound short-yen positions following China's step toward tighter policy.

China's surprise move to raise bank reserve requirements led investors to cut sizeable long positions in the Australian dollar built after strong data from Asia's economic powerhouse. Many investors had been borrowing in yen to buy a range of assets leveraged to Chinese and global growth.

Adding to the negative tone for risk trades and high-yielding currencies was a weak start to the U.S. earnings season. Alcoa Inc's (AA.N) kicked off the U.S. earnings season with results that missed forecasts while Chevron Corp (CVX.N) issued a profit warning. That combined with concerns about a potential U.S. government levy on banks, to hit stocks.

"Both the disappointing start to the U.S. earnings season and the China news sets a negative tone for risk-trades for the next day or two," JP Morgan said in a note.

"We do not regard either though as being a game-changer. China is tightening precisely because the economy is doing so well. This is a timely light touch on the brake; it is not an emergency-stop. It is hard to be bearish Aussie when Chinese loan growth stands in excess of 30 percent."

The U.S. dollar was hovering around 91.07 yen on Wednesday, having lost more than 1 percent on Tuesday to as low as 90.73. The yen was also buoyed by talk of repatriation inflows by Japanese investors who had bought euro-denominated bonds.

Technically a break of the 91.25/90.75 yen support zone meant there was an increased risk of additional retracement for the U.S. dollar. The next line of support for the U.S. dollar is seen around the 90.36/90.00 yen area, which includes the 38.2 percent retracement from its November low.

The euro was a touch firmer on the yen at 131.95 yen, having fallen more than 1.3 percent on Tuesday with support seen around the 131.20 yen area.

The Australian dollar remained on the defensive on the yen at 83.85 yen, having registered its biggest daily drop in eight weeks on the China news. Support is seen around 83.00/20 yen levels, traders say.

The Aussie held just above $0.9200, after it fell more than 1.2 percent on Tuesday, with investors stopped out of long positions on the slide.

The euro was at $1.4489, getting some support after the Greek Finance Minister George Papaconstantinou told a German newspaper on Tuesday that Greece had no more skeletons in the closet, and the country had a solid basis for cutting its deficit.

Worries about Greece's financial situation have weighed on the euro in recent weeks.

(Editing by Wayne Cole)