SYDNEY The Japanese currency extended its decline early in Asia on Wednesday, hitting fresh 11-month lows against the euro and the Australian dollar and looking to deepen its losses as technical support levels threaten to give way.
It embarked on a downtrend after a rare joint G7 intervention last month revived the carry trade with the yen as the funding currency of choice.
In contrast, the European Central Bank is all but certain to hike rates for the first time since July 2008 on Thursday. Hedge fund advisor Medley Global Advisors said in a report on Tuesday the ECB will also build in room to tighten policy further.
The euro last traded at 121.06 yen, having risen to around 121.20, highs not seen since early May 2010. The next major level for the common currency is pegged at around 121.85, the 50 percent retracement of the 2009-2010 fall from 138.50 to 105.50.
The Australian dollar popped above 88.00 yen for the first time since April last year, before giving back some ground to stand at 87.79.
A break above 88.08 would take it back to peaks last seen in September 2008 and pave the way to the psychological 90 level, traders said.
Meanwhile, the U.S. dollar climbed to six-month highs of 85.23 yen, underpinned by a rise in U.S. Treasury yields. The two-year yield rose to 0.84 percent, not far off highs around 0.9 percent set recently, compared with just 0.21 percent in the equivalent Japanese yield.
However, the euro was little changed against the dollar at $1.4218, having reached five-month highs around $1.4268 on Monday, as the market waited for more guidance from the ECB after Thursday's widely expected rate move.
"We expect that Trichet will confirm the importance of carefully monitoring inflation, and against a backdrop of a Fed unlikely to move swiftly to (remove) USD liquidity ... our bias remains for a higher EURUSD post-ECB," BNP Paribas analysts said in a note.
"Our target on EURUSD is 1.45. As for EUR crosses, we could also see them push higher."
The dollar index .DXY, which tracks its performance against a basket of major currencies last traded at 75.907, hovering above a 15-month low at 75.340 set on March 21.
Unlike the ECB, minutes of last month's Fed policy-setting meeting showed the central bank appeared intent to complete a $600 billion bond-buying plan and to keep rates at exceptionally low levels for an extended period.
With both the Fed and BOJ keeping ultra-loose monetary policy in place, investors have been using the yen and dollar as funding currencies to buy higher yielding assets, a lot of which has flowed into commodity currencies like the Australian dollar.
The Aussie recently scaled a 29-year peak at $1.0422 and remained well bid on dips. It fell to an overnight low of $1.0288 in the wake of China's interest rate hike, but quickly recovered to last trade at $1.0330.
The rate hike came as no big surprise as China is battling to tame inflation. The Aussie's fortunes are closely tied to the world's second biggest economy, which is Australia's biggest export customer, particularly for iron ore.
Traders though are cautious about buying the Aussie at these lofty levels.
"Overall, I think Aussie is a sell on rallies because I don't think it's going to go back to $1.04 in a hurry," a trader said.
(Editing by Wayne Cole)