FOREX-Euro falls vs yen, Japan ESM talk has limited impact
* Dollar/yen pressured by profit-taking
* Japan finmin Aso says Japan will buy ESM bonds
* Euro/yen bounces briefly after Aso's comments
* Euro to remain firm vs dollar ahead of ECB meeting
By Anooja Debnath
LONDON, Jan 8 (Reuters) - The euro and dollar sagged against the yen on Tuesday as investors took profit on recent bets against the Japanese currency triggered by anticipation of looser monetary policy from the Bank of Japan.
The single currency gave up earlier gains made after Japanese Finance Minister Taro Aso said the government would buy bonds issued by the European Stability Mechanism (ESM), the euro zone's permanent bailout fund. The move was seen having little impact on the yen.
A jump in the euro to a session high of 115.25 yen from around 114.60 yen after Aso spoke quickly reversed. Strategists said the decision would have little impact on the yen as Japan would most likely buy ESM bonds using existing foreign reserves.
The euro was down 0.5 percent on the day at 114.54, edging further away from an 18-month high of 115.995 yen set on Jan. 2 on trading platform EBS.
"Japan's comments helped euro and dollar/yen a bit higher at first. But then everyone realised they are just going to use current reserves so there should actually be no impact," said Geoff Kendrick, FX strategist at Nomura.
The dollar fell to a session low of 87.23 yen as investors booked profits on its recent rally. It was last down 0.4 percent at 87.40 yen, some way off the 88.48 level touched last Friday, its highest level since July 2010.
The U.S. currency remained under pressure with talk of selling by Asian central banks. Traders and analysts said the dollar was due a pullback against the yen until it was clearer what the Bank of Japan intended to do at its meeting on Jan. 21-22.
"We will perhaps see a marginal retracement (in dollar/yen) over the next couple days and I'd be slightly more bearish dollar over the next few days ... on profit taking," Kendrick said.
The dollar has surged nearly 12 percent in about two months on expectations a new government elected in December will persuade the Bank of Japan to adopt more forceful monetary stimulus measures.
Strategists said the outlook was for further greenback gains.
"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. Chart support was cited just below $1.30, near its 50- and 55-day moving averages.
Markets are positioned for the European Central Bank to keep rates on hold when they meet this Thursday, but strategists said any talk by policymakers about future interest rate cuts could undermine the euro.
With no significant economic data due on Tuesday, the euro would remain firm ahead of the ECB meeting and Spanish and Italian bond auctions towards the end of the week.
"Markets have backed away from peripheral issues in Europe for now and unless we start to get broader concerns, euro/dollar will continue to trade sideways for now," Nomura's Kendrick said.
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