* Dollar pressured against the yen, support at Jan. 1 low of
* Euro to remain firm vs dollar ahead of ECB meeting
By Julie Haviv
NEW YORK, Jan 8 The dollar and euro plunged
against the yen on Tuesday as investors booked profits in the
aftermath of swift and significant gains, but looser Bank of
Japan monetary policy should limit the yen's upside.
The dollar has rallied smartly against the yen for over a
month on expectations that Japan's newly elected government
would push the Bank of Japan, headed by Governor Masaaki
Shirakawa, to adopt more forceful monetary stimulus measures.
After gaining about 5.8 percent since December, the dollar
fell for a second straight session.
"Mainly, this is due to speculation that the Bank of Japan
would fail to meet heightened expectations for a significantly
dovish monetary policy," said Christopher Vecchio, currency
analyst at DailyFX in New York.
Furthermore, the result of the upcoming BOJ policy meeting
may already be priced in, he said.
"Be that as it may, the Japanese yen is simply a very
oversold currency," he said.
The dollar fell to a session low of 86.95 yen after a
rally of nearly 12 percent in recent months that saw the dollar
touch its highest level since July 2010.
It was last down 0.6 percent at 87.24 yen, with solid
support expected at around 86.53, the low hit on Jan. 1.
Analysts said investors were nervous of pushing the yen too
much lower due to the risk the BOJ may not opt for aggressive
stimulus as early as its next meeting on Jan. 21-22, with a
focus on Shirakawa's tenure at the helm of the Japanese central
"We still have Shirakawa, who is not leaving until end of
March, so there is a risk of disappointment," said Chris Turner,
head of FX strategy at ING in London.
The euro initially gained against the yen 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 euro, however, eventually dropped against the yen
because while Japan buying ESM bonds is supportive for Europe,
the country holds mostly dollars and euros in reserves, which
makes its weakening impact on the yen unclear.
The euro was last down 1 percent on the day at
114.04 yen, having earlier hit a session high of 115.21 yen
after Aso's comments.
"Japan's comments helped euro and dollar/yen a bit higher at
first. But then everyone realized they are just going to use
current reserves so there should actually be no impact," said
Geoff Kendrick, FX strategist at Nomura, of the market reaction
to the plans to buy ESM bonds.
EURO FALLS AHEAD OF ECB MEETING
The euro was down 0.3 percent on the day against the dollar
at $1.3075, but above a three-week low of $1.2997 set on
Markets are positioned for the European Central Bank to keep
rates on hold when it meets this Thursday. The single currency
was volatile on market talk that France's sovereign debt rating
would be imminently downgraded but the impact was fleeting. A
French Finance Ministry spokeswoman on her Twitter feed called
the rumors "unfounded and false."
With no significant economic data this week, the euro was
seen staying in a range ahead of the ECB meeting and Spanish and
Italian bond auctions toward the end of the week.
However, any hint by ECB policymakers about future interest
rate cuts could undermine the currency.
"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," said Geoff
Kendrick, FX strategist at Nomura in London.