FOREX-Dollar slips vs yen; euro supported as Japan eyes ESM debt
* Dollar/yen pressured by profit-taking
* Japan finmin Aso says Japan will buy ESM bonds
* Euro/yen bounces after Aso's comments
* But FX impact of Japan ESM bond buying seen as unclear
By Masayuki Kitano
SINGAPORE, Jan 8 (Reuters) - The euro sagged against the yen on Tuesday, but bounced from early lows after Japan said it will buy bonds issued by the euro zone's permanent rescue fund.
Both the dollar and the euro came under pressure early on Tuesday as investors trimmed some of their bearish bets against the Japanese currency.
The euro, however, quickly jumped from around 114.60 yen to an intraday high of 115.25 yen after Japanese Finance Minister Taro Aso said the government will buy bonds issued by the European Stability Mechanism (ESM), the euro zone's permanent bailout fund, to help stabilise the region's financial situation.
Aso said the ESM planned to issue securities later on Tuesday, the first issuance since it was launched last October, and added that Japan would buy a portion of ESM bonds continuously "by utilizing foreign reserves".
Japan has previously purchased bonds issued by the euro zone's temporary rescue fund, the European Financial Stability Facility.
The euro last changed hands at 114.83 yen, down 0.3 percent on the day. The euro had fallen as low as 114.50 yen earlier on Tuesday, edging away from an 18-month high of 115.995 yen set on Jan. 2 on trading platform EBS.
Although the euro climbed against the yen following Aso's remarks, some market players said it was unclear whether Japan's plans to buy ESM bonds would have any direct impact on the yen.
Japan could conceivably switch out of euro-denominated bonds held in its foreign reserves to buy ESM debt, said Rob Ryan, strategist for RBS in Singapore.
If that is the case there would be "no currency impact whatsoever," Ryan said.
The dollar hit an intraday low of 87.23 yen as investors booked profits in the wake of the greenback's recent rally. It briefly surged to about 87.89 yen after Aso's comments but later retreated.
The dollar last changed hands at 87.49 yen, down 0.3 percent on the day. The greenback had climbed to 88.48 yen on Friday on trading platform EBS, its strongest level against the yen since July 2010, or nearly 2-1/2 years.
Traders and analysts said the dollar had been due for a pullback against the yen.
The dollar had leapt nearly 12 percent in about two months, due to expectations that the new government elected in December would persuade the Bank of Japan to adopt a more forceful monetary stimulus approach.
"I think the market will now try to find what the dollar's range against the yen will be, for example whether we are in for an 83-88 range or 85-90," said Satoshi Okinawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation.
The euro held steady against the dollar at $1.3124, above a three-week low of $1.2998 set on Friday.
"From a fundamental and technical perspective, the euro/dollar appears poised for a stronger recovery," said Kathy Lien, managing director at BKX Asset Management.
"Fundamentally, a reduction in sovereign risk this year should help restore confidence in euro zone assets and technically, $1.30 is a significant level for the currency," she said in a research note.
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