TOKYO The yen quickly erased losses on Friday made after the Bank of Japan went slightly beyond market expectations in its much-awaited easing steps, as traders quickly covered short positions in a market already overwhelmingly yen short.
Standard & Poor's two-notch credit rating downgrade on Spain also fanned a risk-averse mood among market players, knocking the euro off a three-week high and helping the yen regain footing.
The Bank of Japan increased bond buying by 10 trillion yen, expanded the target of its bond purchases to bonds with up to three years left to maturity from those with two years or less, and increased its buying of stock ETFs.
The bank also extend the period of its asset purchases to June next year from December.
"I think the BOJ did pretty well this time in finding the narrow path of not disappointing the markets. It wasn't a big surprise overall, though its decision to boost ETFs may have done some tricks," said Ayako Sera, senior market economist at Mitsui Sumitomo Trust Bank.
The dollar rose to as high as 81.45 yen from below 81 yen, though various players -- profit-takers as well as Japanese exporters -- were quick to take that as an opportunity to sell the U.S. currency after hype about the BOJ's easing for weeks.
Traders said the BOJ's easing was no bazooka that would push the dollar beyond its 11-month peak of 84.187 hit last month, given that other central banks could pull the trigger in the future.
"Basically we all know that the BOJ, the Fed and the ECB have no choice but to print more money as lenders of last resort. I see the dollar stuck in a range this quarter, around 80-84 yen," said Hideki Amikura, forex manager at Nomura Trust and Banking.
Traders say the dollar has strong support from the cloud top of its weekly Ichimoku charts at 80.42. Another pivotal point will be 80.10, a 50 percent retracement of its rally from February to March.
For now the market is focusing on BOJ Governor Masaaki Shirakawa's news conference, which is expected to finish at around 4:15 p.m. (0715 GMT).
The euro briefly skidded to $1.31766 from around $1.3240 late in New York, after Standard & Poor's cut its credit rating on Spain to BBB-plus from A and gave it a negative outlook, warning it expects the government's budget deficit to deteriorate even more than previously thought due to economic contraction.
"This could boost Spanish bond yields again later today to above the six percent mark. The euro could fall further during the European session," said a trader at a Japanese bank.
The market is also looking at debt auction by Italy later in the day. Rome will sell up to 6.25 billion euros of bonds. The market is pinning its hopes on support from domestic banks, which has helped Italy push auctions through even when spiraling concerns last November threatened to tip the country into a Greek-style debt crisis.
The euro last stood at $1.3189, off a three-week high of $1.32635 hit on Thursday and down 0.2 percent from late U.S. trade.
S&P also affirmed its BBB-plus rating for Ireland but said its negative outlook meant there is a one-in-three chance it could cut the rating in 2012 or 2013.
With the euro under renewed pressure, the dollar index .DXY popped up to 79.172, from a 3-1/2-week low of 78.823 plumbed on Thursday.
The Aussie last traded at $1.0360, having slipped from Thursday's session high of $1.0399 in sympathy with the euro's decline.
(Additional reporting by Ian Chua in Sydney; Editing by Jacqueline Wong and Jonathan Hopfner)