* 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 (Reuters) - 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 EURJPY=R.
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.
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)