NEW YORK (Reuters) - The Group of Seven on Friday launched its first coordinated currency market intervention since 2000 and pledged to do more if needed to rein in a soaring yen, but investors betting on a sustained decline in the Japanese currency could be disappointed.
Both the Federal Reserve and Bank of Canada said they had sold yen, bolstering European and Japanese efforts to weaken the currency and calm markets after Japan's devastating earthquake, tsunami and unfolding nuclear crisis.
The dollar rose nearly 4 percent to 82.00 yen on trading platform EBS in European trade, but hedge funds and other speculative accounts tested official resolve by buying into the yen sell-off. The dollar last traded at 80.58 yen, though still up 2.4 percent on the day.
"We still think that there will be appreciation pressure on the yen," said David Mann, head of research, Americas, at Standard Chartered in New York. "I would expect strong defense of 80. We can't rule out testing below that and then seeing intervention push it back higher again."
C.J. Gavsie, director of FX sales at BMO Capital Markets in Toronto, said since North American trading hours began, there had been "straightforward pressure to be buying yen and selling dollars, which is exactly the opposite" of what central banks were trying to achieve. As a result, the dollar quickly retreated below 81 yen.
Tokyo market estimates had the Bank of Japan selling some 2 trillion yen ($25 billion) over the course of the day. Nomura Securities estimated the European Central Bank intervened to the tune of about 5 billion euros ($7.1 billion).
The Bank of Canada was estimated to have spent around C$100 million to C$150 million ($101.5 million to $152.3 million), according to BMO Capital.
Expectations that Japanese retail and corporate investors would start bringing money home for rebuilding after the disaster drove the yen up this week. So did heavy selling by margin traders who were forced to unwind positions funded with cheaply borrowed yen as risk aversion spiked.
While official yen-selling could continue for weeks, analysts emphasized that the main goal of intervention is to reduce volatility but not necessarily to weaken a currency.
Central banks "want to make sure the speculative element is at a minimum," said David Watt, senior currency strategist at RBC Capital Markets in Toronto. "And they want to make sure that operationally, the market will always have another side."
YEN LONGS TO FALL
Net yen long positions rose to 30,230 contracts from last week's 16,656 contracts, data from the Commodity Futures Trading Commission showed on Friday. Analysts expect yen longs to drop after Friday's intervention.
Technical analysts noted upside targets around Monday's peak of 82.45, followed by the 100-day moving average of 82.61 and 83.30, the intraday high from last Friday. Nomura currency strategists said the 82.70-83.00 range would be an "ideal level" for computer-driven model accounts to buy dollars.
Giuseppe Manieri, principal of Premium Currency Advisors, said Friday's closing level is important. "If it is on the higher side of the weekly bar," it might mean a reversal.
"For now on the long-term side nothing has changed, the trend is still heavily downwards," he said. Zurich-based Premium Currency Advisors has $875 million under management.
Paresh Upadhyaya, strategist at BofA Merrill Lynch, said it may require a move toward higher interest rates in the United States to sustain downward yen momentum.
"For intervention to be successful, it needs to be followed by policy action," he said. "If the Fed starts openly debating exiting quantitative easing, that would move interest rate differentials sharply in favor of the dollar against the yen."
As the dollar rebounded, it became cheaper to hedge against further yen gains. Implied volatility on one-month dollar/yen options stood at 13.15 percent, down from 21 percent on Thursday.
In currency ETF options, volume on the CurrencyShares Japanese Yen Trust (FXY.P) was four times the average daily turnover with about 15,000 puts and 5,811 calls traded, according to options analytics firm Trade Alert.
Options on the Proshares UltraShort Yen Fund (YCS.P) turned busy for a second straight session. Overall volume of the fund was 6.6 times the average daily levels with about 13,000 calls and 430 puts traded on Friday, according to Trade Alert.
The euro hit a session high around 115.56 yen before easing to 114.36, up about 3.4 percent.
The euro rose to a four-month high against the dollar of around $1.4185 after the intervention in euro/yen. (Additional reporting by Steven C. Johnson and Gertrude Chavez-Dreyfuss in New York, Doris Frankel in Chicago, Claire Sibonney and Ka Yan Ng in Toronto, and Martin de Sa'Pinto in Zurich; editing by Dan Grebler)