FOREX-Yen gains vs dollar; ECB remark briefly boosts euro
* Dollar/yen under pressure from profit-taking * Yen direction hinges on BoJ meeting next week * ECB's Nowotny reassures market after Juncker comments By Gertrude Chavez-Dreyfuss NEW YORK, Jan 16 (Reuters) - The yen advanced against the dollar and euro for a second straight session on Wednesday as a recent warning from a Japanese official about excessive yen weakness continued to underpin the currency. The euro, meanwhile, slipped for a second consecutive day against the dollar on persistent concerns about the region's economy. Europe's shared currency briefly bounced after European Central Bank member Ewald Nowotny said the euro's exchange rate was "not a matter of major concern." That was in stark contrast to comments from Eurogroup head Jean-Claude Juncker, who on Tuesday prompted investors to sell the euro by saying it was "dangerously high." The focus, however, remained squarely on the yen, which has captured investors' attention the last two months. Forecasts of aggressive action by the Bank of Japan to weaken its currency drove the dollar sharply higher in recent months, with the greenback gaining nearly 11.3 percent in the fourth quarter of 2012 and 2.1 percent so far this year. However, after the yen hit a 2-1/2 year low of 89.67 this week, most believe it was poised to recoup losses, with a correction ignited by Japanese Economics Minister Akira Amari's comments on Tuesday. Amari cautioned that excessive yen weakness could boost import prices and hurt people's livelihood. "People are still looking for further yen weakness but there has been a pullback in yen selling obviously due to Amari's comments," said Brian Kim, currency strategist, at RBS Securities in Stamford, Connecticut. "Investors haven't really seen hard decisions from the Japanese government about weakening the yen so there are some questions there." Market participants have put on big bets against the currency with the new government in Tokyo very vocal about pressing the central bank to tackle deflation, calling for a 2 percent inflation target. The Bank of Japan is widely expected to agree to such a target at its policy meeting on Jan. 21-22, although some traders said there could be selling in dollar/yen afterwards, based on "buy on the rumor, sell on the fact." The dollar last traded at 88.45 yen, down 0.4 percent on the day. Traders cited supporting bids at 87.70-87.80 yen. Still many analysts believe the yen's decline in recent weeks has been quite extreme and its rally this week could persist in the short term. "For the time being, we think the yen's fall has been too far and too fast, and look for corrective yen strength before a renewed decline," said Nick Bennenbroek, head of currency strategy at Wells Fargo Bank in New York. He added that yen positioning was already extended, with speculative yen shorts more than 80 percent of their recent December peak. Bennenbroek believes the dollar could fall to 87 yen over the next three months, before a gradual strengthening over the longer-term to a rate of 90 over the next 12 months. Wednesday's sell-off in dollar/yen dragged all of the major currencies lower. The euro also fell against the yen to trade down 0.5 percent lower at 117.59. The euro had climbed to its highest in 20 months earlier this week after the ECB dashed expectations of a near-term rate cut. "What we are witnessing is deleveraging," said Kathy Lien, managing director of FX strategy for BK Asset Management in New York. "Over the past 2 months, with the blessing of Prime Minister (Shinzo) Abe who pledged to ease monetary policy aggressively, many investors jumped back into yen-funded carry trades and now they are taking profits below key levels after Japanese officials expressed concerns about yen weakness," she said. EURO EDGES LOWER The euro slipped 0.1 percent against the dollar to $1.3291. Weak economic data from Europe highlighted the disparity with the U.S. economy. Demand for new cars in Europe fell to a 17-year low in 2012, and even the German economy is suffering from the euro zone recession. If economic data continues to weaken, the ECB may opt to cut rates, a negative for the euro. In the United States, muted inflation pressures should give the Fed more room to prop up the economy by staying on its ultra-easy monetary policy path. U.S. consumer prices were flat in December. The euro had rallied smartly in the days following last week's ECB meeting. ECB President Mario Draghi downplayed expectations of another rate cut and painted a more positive outlook for the euro zone economy. His supportive comments sent the euro to an 11-month high of $1.3403 this week, according to Reuters data.
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