* Dollar/yen retreats after hitting high of 90.25 yen
* Investors position for aggressive action from BOJ
* Risk of disappointment could lead to yen gains
By Anooja Debnath
LONDON, Jan 21 The yen rose against the dollar
on Monday from a 2-1/2 year low, with traders trimming large
bets against the currency in case monetary easing measures
expected from the Bank of Japan are disappointing.
The yen is likely to stay firm until the BOJ's policy
decision is known when the two-day meeting ends on Tuesday. The
central bank, which is expected to double its inflation target
and increase its asset purchase programme, said it would begin
the meeting earlier than usual.
Traders and analysts said if the BOJ met expectations then
the dollar would lose a bit more ground, given the huge gains it
has made since October and investors such as hedge funds would
be keen to book profits.
Short yen positions were significantly large before the BOJ
meeting. Financial markets are expecting a joint statement from
the bank and the government to announce a 2 percent inflation
target, an increase in asset purchases with an open-ended
commitment, and possibly other measures.
The dollar was down 0.5 percent on the day against the yen
at 89.60 yen with volumes thin because of a US holiday.
It had earlier touched 90.25 yen, its highest since June 2010,
only to retreat.
"We see a bit of short covering going into the BOJ meeting
with people being a little mindful that there could be some
disappointment," Jeremy Stretch head of currency strategy at
CIBC World Markets.
"Investors are being mindful that the moves we have seen
over the course of the last month or two are just worth locking
in at least until we understand how the BOJ are really going to
play in the future."
Chartists cited support for the dollar near 89.10 yen, the
low hit on Jan. 14, and said if it stayed above that investors
would still see it as a good opportunity to buy dollars on dips.
Since mid-November, the dollar has risen about 13 percent
while the euro has risen about 20 percent against the Japanese
currency as speculators and long-term investors turned
overwhelmingly negative on the currency.
"It is reasonable that some of the investors are closing
record short yen positions ahead of the meeting," said Carl
Hammer, chief currency strategist at SEB Merchant Banking.
He said that while the dollar would be headed higher against
the yen this year, there was room for correction in the near
term, leaving the dollar to trade between 86-88 yen in the
Against the yen, the euro fell 0.4 percent to 119.35 yen
, off a 20-month peak of 120.73 hit last week, while
the Australian dollar shed 0.4 percent to 94.19 yen,
slipping from a four-year high of 95.02 set Friday.
Some of the nervousness in the currency market before the
BOJ decision was reflected in the options market where overnight
implied volatilities in dollar/yen jumped to 28
percent from around 15.3 percent late last week.
"The market is worried about the BOJ outcome," said an
options trader at an European bank. "Investors have built
positions in anticipation of the BOJ decision. If dollar/yen
falls after the event, we could see near term vols ease."
The cost of hedging against yen weakness in the options
market has been rising since late last year. So if the yen earns
a temporary reprieve after the BOJ decision it could ease some
of the upward pressure on hedging costs, traders said.
Meanwhile, the euro was flat on the day at $1.3310,
having been capped by the $1.3400 level in the past week with
traders citing stop-loss sell orders under $1.3280 and $1.3250.
Strategists said the euro was likely to remain firm over the
next few sessions as concerns around the euro zone crisis
continued to ease, unless sentiment data later this week
surprised to the downside.
The Bundesbank said on Monday that Germany's economic slump
should be short-lived, adding that euro zone's largest economy
could have already bottomed out.
Data on Friday showed currency speculators increased their
bets against the U.S. dollar and went long on the euro, helped
by European Central Bank chief Mario Draghi's comments that
prospects in the euro zone were starting to improve.