* Yen recovers after knee jerk reaction to earthquake
* Euro edges up, focus on Friday's EU summit
* Short-term bias remains positive for the euro
(Adds comment, updates, changes dateline, previous TOKYO)
By Anirban Nag
LONDON, March 11 The yen recovered after a major
earthquake in Japan drove it to a two-week low against the
dollar early on Friday, although it could stay choppy on near
term worries about the impact on a struggling Japanese economy.
Traders said the initial reaction in the yen was a knee-jerk
one with Japanese investors turning heavy sellers of the dollar
after it hit highs. They cited solid offers from Japanese
exporters above 83 yen, which some said was likely to cap any
upside for the U.S. currency.
By 0924 GMT, the dollar had lost 0.1 percent to 82.81 yen
JPY=, pulling back from the two-week high of 83.29 yen hit in
the Asian session. Traders said the yen was supported by talk of
repatriation flows that could follow to pay for damage repairs.
"In an economic perspective, the reaction in dollar/yen has
been contained. The selloff has now reversed," said Jeremy
Stretch, head of currency strategy at CIBC. "The short term
range on the downside is 82.50-82.55 yen."
The euro rose 0.1 percent against the yen to 114.47 yen
The euro also rose 0.3 percent against the dollar to $1.3835
EUR=, stabilising after steep falls in the previous session
but it remained vulnerable to a sell-off if a euro zone summit
later in the day fails to ease concerns about sovereign debt.
For now, the single currency remains on an upward bias in
the short term on the technical charts. But it needs to stay
above $1.3777, a touch higher than Thursday's low in order to
maintain its bullish momentum.
A daily close below $1.3777 would probably push the euro to
$1.3591, a 38.2 percent Fibonacci retracement of the January to
early March rally, analysts said.
BUY ON DIPS FOR EURO
Euro zone leaders meet on Friday, ahead of a full 27-nation
European Union summit on March 24-25, to tackle a debt crisis
that has pressed the euro for a year. There was some nervousness
before Friday's meeting, but that has dissipated as investors
expect no major announcements.
Some analysts said a "buy-on-dips" strategy makes sense for
the euro as the prospect of a series of rate hikes by the
European Central Bank should underpin the currency this year.
"Next week we expect the investor focus to return to rate
expectations, which will allow the euro/dollar to trade back
above $1.40," BNP Paribas said in a note.
But gains by the euro do run the risk of a pullback if
investors believe that policymakers are failing to find a
durable solution to the crisis.
Moody's also turned up the heat on Europe this week,
slashing Greece's credit rating by three notches and Spain by
one and threatening more downgrades. That has weighed on the
euro since it hit four-month highs last Monday.
Implied volatility on the euro versus the dollar edged higher
across the curve in line with the single currency's fall in the
spot market on Thursday. One-month implied volatility on
euro/dollar, for instance, hit as high as 10.35 percent from
Thursday's peak of 10.25 EUR1MO=.
Traders are expecting sharp moves over the next 30 days with
the European Union heads of state summit on March 24-25 and a
possible rate hike by the European Central Bank in early April.
Sentiment on the euro has also deteriorated a bit in the
options market, with one-month 25 delta risk reversals showing a
bias for puts at -1.700 vols EUR1MRR=GFI on Friday. Earlier in
the week, one-month euro/dollar puts were at -1.125 vols, higher
than current levels and in line with the euro hitting four
month peaks above $1.4035.
Euro zone crisis intensifies on summit eve [nLDE7290IP]
Graphics: Credit ratings r.reuters.com/pyh48r
Euro zone's debt struggle r.reuters.com/hyb65p
(additional reporting by Gertrude Chavez-Dreyfuss in Tokyo and
Niki O'Callaghan; editing by Patrick Graham)