March 17, 2011 / 7:11 AM / 6 years ago

REFILE-FOREX-Yen powers to all-time high, Japan may intervene

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* Yen rockets to 76.25 vs dollar, pulls back to near 79.00

* G7 to meet, traders on guard for Japan intervention

* Japan retail trader margin calls blamed for volatility

* Margin calls on Japan share losses spur yen buying

* USD/JPY to struggle on any rise towards 79.00 (Updates price levels)

By Hideyuki Sano and Masayuki Kitano

TOKYO/SINGAPORE, March 17 (Reuters) - The yen soared to a record high of 76.25 against the dollar on Thursday, reaching levels that may force more market players to unwind positions and test the resolve of Japanese authorities who are threatening intervention to stem the currency's strength.

As the shock of Friday's massive earthquake and tsunami worsened into a nuclear crisis, the yen has climbed as investors cut back on carry trades and positioned for Japanese investors selling overseas assets to bring home funds.

A break through the previous record of 79.75 triggered a cascade of stop-loss and algorithmic selling of the dollar, sending the yen surging in illiquid trade in the hours between the U.S. and Asian trading days.

Dollar/yen clawed back to near 79.20 on buying by Japanese importers and some retail margin traders, but the huge earlier drop to the record was seen prompting other investors to shed long positions in higher-yielding currencies, traders said.

The Japanese margin traders were cited as one of the main factors behind the plunge in the dollar as stop-loss orders were triggered in their leveraged bets in currencies like the Australian dollar.

Just the day before, Japanese margin traders had built up long positions in dollar/yen totalling $2.8 billion, according to data from the Tokyo Financial Exchange. Total long positions in major currencies including dollar/yen were a record $8.25 billion.

Traders also said that foreign investors were scrambling to get hold of yen to settle margin calls on bets on Japanese shares deeply in the red, forcing them to turn to spot currency at times as well as forwards and cross-currency swaps .

With a high risk of Japanese authorities intervening if the yen rises further from current levels, some market players were waiting for an intervention-sparked spike in dollar/yen before unloading positions, traders said.

A stronger currency risks compounding Japan's economic troubles at a time when it is struggling to contain a worsening nuclear crisis, convincing many market players it was only a matter of time before Japanese authorities intervened against further yen strength.

"There is a real possibility that authorities would intervene to calm the markets, though I don't think it will be heavy," said Junya Tanase, foreign exchange strategist at JPMorgan Chase in Tokyo.

Japan's finance minister blamed speculation for the yen spike and said he was closely watching markets, a warning that the Bank of Japan may soon be given the signal to buy dollars.

Japan launched a record one-day, $26 billion bout of dollar-buying intervention in September when a stronger currency was undermining the Nikkei average and threatening to worsen deflation.

Group of Seven finance leaders and central bankers will discuss possible steps to calm markets roiled by Japan's crisis at 7 a.m. Tokyo time on Friday (2200 GMT on Thursday).

FX analysts at Citigroup said there was an "extremely high" risk of intervention in the next 24 hours.

While the escalating nuclear crisis and subsequent rush for safety was the initial spur for the yen surge, the move higher was almost all about positioning.

All sorts of exotic option and structured products were stopped out, on top of the unwind of the leveraged long trades held by the margin traders. Traders said one factor this time around was likely flat forward derivatives that have soured on some small and mid-sized Japanese exporters.

During the surge, traders said the market was disorderly. Liquidity evaporated and bids were pulled.

"It's mayhem out there," said one trader at an Australian bank in Sydney during the move.

The dollar's collapse cracked the previous record of 79.75 struck in 1995 in the months following the Kobe earthquake.

If Japanese authorities do not intervene, the 79.50 level serves as a zone where traders may build up short positions. Previous major lows between 79.75 and 80.21 will provide strong resistance. But a break above 80.30 -- near the November low -- would be positive for a near-term dollar rebound.

The yen also flew on the crosses, jumping around 6 big figures on the Aussie to as far as 74.50 yen , a six-month high, before falling back to 77.80 yen.

The Aussie has shed about 6 percent against the yen so far this week as investors sell it as proxy for risk and global growth.

An unwind of yen-funded carry trades has driven the Japanese currency higher all week, with traders seeing few signs yet of expected Japanese investor repatriation of funds in foreign assets to help cover costs from the crisis.

Japanese officials played down the risks of repatriation on Thursday, with Economics Minister Kaoru Yosano saying the yen was driven by speculative moves and not repatriation.

The cost of hedging against a further yen rise jumped, with implied volatility on one-month dollar/yen and Aussie/yen options reaching near 20 percent.

Traders said the dollar/yen options market was short gamma below 80, raising the risk that option dealers would need to sell the yen into a renewed slide back toward the lows.

The Aussie was at $0.9828 and fell as far as $0.9705 on Thomson Reuters Matching, a three-month low and a huge reversal from $1.0143 at the end of last week.

The euro/dollar pair was a relative sideshow at $1.3922 . (Additional reporting by Kazunori Takada in Shanghai and Ian Chua in Sydney; Rick Lloyd is a Reuters FX analyst; Writing by Eric Burroughs; Editing by Kim COghill)

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