* Yen holds near one-week highs vs USD & euro
* Markets nervous as Middle East tension heats up
* U.S. & allies gear up for probable military strike against
By Ian Chua
SYDNEY, Aug 28 The safe-haven yen held at
one-week highs against the dollar and euro early in Asia on
Wednesday, having posted its biggest rally in over two months as
investors scrambled for safety amid heightened geopolitical
The United States and its allies were gearing up for a
probable military strike against Syria that could happen within
days as punishment for last week's chemical weapons attacks
blamed on President Bashar al-Assad's government.
The dollar fell to 97.10 yen, from a high around
98.54 on Monday. A break below the Aug. 20 low of 96.91 could
pave the way for a retest of this month's trough under 96.00.
The shift to safety seemed to benefit Treasuries, with
10-year yields down at 2.72 percent for a sizable 21
basis point drop in just three sessions.
The euro traded at 130.00 yen, well off Monday's
peak around 131.72, while the Australian dollar wallowed at
87.18 following a 2-percent drop.
Against the greenback, the euro edged up to $1.3394,
helping knock the dollar index to a one-week low.
Emerging markets currencies were hit hard initially,
although most managed to regain their footing. The Mexican peso
plumbed a two-month low of 13.373 per dollar at one stage
before recovering to 13.240.
"To me it is actually not clear that Syria is necessarily
that big a negative for global markets for more than a few
days," CitiFX's Head of Latam Strategy Dirk Willer said in a
"But the outsized reaction in EM suggests that EM is still
extremely fragile and can easily get buffeted by any negative
Indeed, many emerging markets were already on shaky grounds
thanks to an outflow of hot money as investors positioned for
the U.S. Federal Reserve to begin scaling down its bond-buying
stimulus next month.
"Assuming that the more drastic scenarios do not
materialize, we expect the FX impact from Syria to be
temporary," BNP Paribas currency strategists wrote in a note.
"A more important dynamic is the process of asset
reallocation from emerging markets which is likely to persist."
Market sensitivity to U.S. data will also likely be restored
in the months ahead as more liquid trading conditions return
following the end of the summer lull, they added.
U.S. data on Tuesday showed home prices rose in June, while
consumer confidence rebounded in August.
There is little in the way of market-moving news in Asia.
Bank of Japan Deputy Governor Kikuo Iwata is scheduled to speak
at the Kyoto Chamber of Commerce and Industry later.