Yen higher after Japanese minister discourages further drop

NEW YORK Mon May 20, 2013 11:45am EDT

1 of 2. A picture illustration shows U.S. 100 dollar bank notes and Japanese 10,000 yen notes taken in Tokyo August 2, 2011.

Credit: Reuters/Yuriko Nakao

NEW YORK (Reuters) - The yen climbed back from a 4-1/2-year low against the dollar on Monday after Japan's economy minister suggested the currency might have weakened enough.

The economy minister, Akira Amari, said the yen's excessive strength had largely corrected and further weakness could damage Japan's economy.

Analysts, however, said any sharp dip in the dollar against the yen was a buying opportunity as Tokyo was committed to easier monetary policy. While the dollar fell sharply on Amari's comments and remained down on the day, it was off the session low.

"What is remarkable about today's price action is that dollar/yen refused to buckle despite Mr. Amari's attempts to talk it down, indicating the strength of the momentum in the pair," said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York. "Still, dollar/yen is clearly overbought and is due some pause and correction in the near future."

The dollar was last 0.7 percent lower at 102.50 yen, having hit a low of 102.19. The euro lost 0.5 percent to 131.90 yen, and its low on Monday, at 131.02, was the lowest since May 9.

Last Friday, the dollar reached a high of 103.30 yen.

The Bank of Japan begins a two-day policy meeting on Tuesday. It is expected to keep policy unchanged but could tinker with its bond-buying plan to curb a recent rise in Japanese yields.

"Any dip in dollar/yen towards 101 or 102 yen is a buy as Japanese policymakers are clear that there will be more asset purchase or quantitative easing in the longer term," said Alvin Tan, a currency strategist at Societe Generale in London.

Tan said short-term momentum indicators such as the 14-day relative strength index showed the dollar was overbought against the yen, hence a pullback was due.

Investors will also look to Federal Reserve Chairman Ben Bernanke's testimony to Congress on Wednesday. He has shown no signs of wanting to taper the Fed's bond-buying plan soon, but the program could be slowed later this year if the U.S. labor market continues to improve.

"We are dollar bulls and expecting more pieces of the puzzle to fall into place - most notably serious speculation over the normalization of Fed policy, which can drive U.S. money market rates and the dollar substantially higher," Chris Turner, head of currency strategy at ING in London, wrote in a note.

The softer dollar pushed the euro 0.2 percent higher to $1.2867, off a six-week low of $1.2795 touched on Friday. Additional gains would be limited given strong expectations the European Central Bank will cut its deposit rate - the rate paid on surplus cash parked by banks - below zero in coming months.

JPMorgan lowered its second-quarter euro/dollar forecast to $1.30 from $1.32 to reflect a shallower U.S. downturn, slower Chinese growth and a protracted euro zone recession.

Some $3.8 billion in euros changed hands on Reuters Dealing on Monday and $2.6 billion in yen.

(Reporting By Nick Olivari; Editing by Leslie Adler)