FOREX-Yen firms as China PMI sparks flight to debt; Aussie languishes
* Yen stronger across the board
* Aussie stung by weak China PMI
* Nikkei tumbles 7.3 pct; investors head for Japanese debt
* Fed could step down bond-buying pace if economy improves
By Sophie Knight
TOKYO, May 23 (Reuters) - The yen gained across the board on Thursday, bouncing sharply off a 4-1/2-year low against the dollar and notching up a two-week high against the euro after a whiplash move in stocks prompted investors to scramble for safety in Japanese bonds.
The yen was squeezed 1.5 percent up to 101.62 yen after investors took weak Chinese factory data as an excuse to topple the Nikkei from a 5-1/2-year high, sending it plummeting 7.3 percent and prompting a rush for Japanese debt.
If the dollar fell to 101.14 yen, it would mark a 23.6 percent retracement of its rally between April 4 and May 22.
That was a sharp reversal from Wednesday, when the greenback raced to a fresh 4-1/2-year high of 103.74 yen after Fed chief Ben Bernanke told Congress that the central bank could "in the next few meetings take a step down" in its bond purchases.
On Thursday, the market began to focus on Bernanke's caveats that any decision to reduce its buying would not mean the Fed would automatically push for a complete roll back of the stimulus, and that it could yet raise the pace of purchases depending on how the economy evolves.
"Bernanke didn't actually say they would give up on QE3 early, but market players decided to read it that way this morning ... the junior players were buying USDJPY before they realised the senior guys hadn't yet," said a trader at a major Japanese bank.
"The smart people who were long on the dollar-yen sold it at 103. On top of that, the Nikkei's fall meant people had to unwind their FX hedges on equities and sell dollars," he added.
The Nikkei's tumble helped the 10-year Japanese bond yield come down to 0.825 after it hit 1.000 percent earlier in the session, its highest in more than a year, after U.S. Treasury prices beat a hasty retreat overnight.
The yen's gains were most dramatic against the Australian dollar, which tumbled 1.8 percent to 98.20 yen to a 7-week low after data showed factory activity in China shrank for the first time in seven months in May.
The flash HSBC Purchasing Manager's Index (PMI) for China, Australia's biggest export market, dropped to 49.6 in May, slipping under the 50-point level demarcating expansion from contraction for the first time since October.
That left the Aussie languishing 0.9 percent down at $0.9608 and fast approaching its June 2012 trough of $0.9581. The currency has shed 7 percent this month as the U.S. dollar has surged across the board and the central bank surprised with a rate cut.
The firmer yen took a stand against the euro too, racing up 2.1 percent to 130.40 yen, its highest since May 9. The euro was sluggish against the dollar, dropping 0.2 percent to $1.2836 to approach its 6-week low of 1.2796 hit on May 17.
The dollar index was off 0.2 percent from late U.S. levels on Wednesday, when it squeezed up to 84.498, a peak not seen since July 2010, on the prospect that the Federal Reserve might scale back its stimulus programme this year.
The dollar's recent resurgence has convinced some market participants that it could yet stretch as far as 105 yen in the near future.
"From the beginning of May, the yen's slide slowed down or stopped against a number of currencies, but the dollar's broad strength means it continues to slide against USD," said Minori Uchida, chief FX analyst at the Bank of Tokyo-Mitsubishi UFJ.
"Everyone said it would be hard for it to get over 95, 100, and 103, so I don't think there's much blocking it from 105...as long as the factors that have driven dollar strength don't change, putting a floor under the yen will be difficult."
The yen is still down 3.4 percent against the dollar since the beginning of May, compared to 1.6 percent against the euro . Against the Aussie, the yen has actually gained 3.2 percent this month.
"The Aussie is suffering because of the weak Chinese data that came out. So unfortunately for commodity currencies, it still looks pretty negative in the short term," said Mitul Kotecha, head of global FX strategy at Credit Agricole in Hong Kong.