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NEW YORK The yen surged to a record high against the U.S. dollar, which fell to 76.25 yen, as Asian trading began on Thursday in the wake of a powerful earthquake and tsunami that shook Northeast Japan.
The Japanese currency has jumped more than 8 percent versus the greenback over the last week.
Nomura Securities International Inc's global head of G10 FX strategy Jens Nordvig told Reuters there are several factors driving yen strength. One of them, he said, is global risk aversion that has prompted Japanese investors to hold back on their overseas buying of assets and keep their funds onshore.
Nordvig believes the yen has peaked against the dollar for now, as the threat of Japanese intervention to weaken a soaring yen loomed. But he expects the dollar to resume gains against the yen in the medium term, given an improving U.S. economic picture compared with Japan, which now has to grapple with rebuilding an economy shattered by last week's disaster.
Reuters: Why is the yen rising against the dollar despite the earthquake, the potential for a nuclear crisis, and the obvious damage to the Japanese economy?
Nordvig: "When you have risk aversion in Japan, the normal day-to-day outflows that happen in a normal market environment slow down. So the capital outflows just become less and that skews the flows picture, and therefore, you are seeing the yen strengthen.
"Japanese investors have a capital surplus that under normal circumstances they need to deploy abroad. In times of risk aversion, they will probably hold back in buying overseas assets."
Reuters: Are speculative flows also a big part of the strength in the yen?
Nordvig: "There will be systematic traders who have more of a trend-following approach that are likely to be long yen in some form. We have tracked what's going on at the Chicago Mercantile Exchange in the U.S. futures market. Data suggests that long yen positions have increased." (Long yen trades are bets that the currency will strengthen further).
Reuters: Part of the rise in the yen is being attributed to expectations of repatriation flows from Japanese insurers who may sell their foreign assets to contribute to Japan's reconstruction efforts. Are you seeing these repatriation flows?
Nordvig: "Our sense is clearly repatriation is something that has not happened yet. We are not forecasting large-scale repatriations. On the insurance flows, you can calculate the insured amount and how much the government is on the hook for in terms of reinsurance."
Reuters: Do you think insurance flows into the yen would be substantial? Is this enough to boost the yen?
Nordvig: "In a scenario where insured damages amount to $20 billion, the Japanese government is liable for $10 billion, leaving the private sector with another $10 billion. And most of that will be borne by domestic insurers drawing down on yen-based assets. Some of them will be drawn by global reinsurers.
"In any case, a portion of $10 billion at any given time, is not expected to have a dramatic impact on the yen."
Reuters: Where do you see dollar/yen going forward?
Nordvig: "We have a G7 meeting happening in a few hours. And I think the conditions are really in place for intervention now."
"We had a large move since the earthquake hit and in my perspective, the moves have been disorderly. Those are the conditions that you typically would want to stabilize the market in some form. Importantly, given the circumstances in Japan, I don't think there would be foreign opposition to intervention. G7 partners are going to be understanding."
Reuters: At what level do you think Japan will intervene in the market to prop up the dollar versus the yen?
Nordvig: "It would depend on the level of dollar/yen. I would think, that anything under 78 yen would probably trigger intervention immediately."
Reuters; Would it be a unilateral intervention?
Nordvig: "There are three forms of intervention. There is unilateral and coordinated. And then there is something" else.
"We could see an endorsed intervention. You may not see the European Central Bank or the Federal Reserve participate in the intervention, but you could see the G7 endorse the Japanese authorities' move in the FX market. That could help the effectiveness of the move."
Reuters: Do you think the intervention, if it happens, will be effective?
Nordvig: "The last time around, the Japanese intervention produced a 3 percent move in dollar/yen. It could potentially be a bigger move. The only thing is that a lot of Japanese exporters were knocked out of their hedges in their panic move yesterday. They were knocked out of option hedges and they may have a significant need to re-hedge and would look for levels above 80 to get that done. But overall, intervention would be quite effective in stabilizing dollar/yen for the next couple of weeks."
Reuters: Do you now see the dollar falling against the yen in the medium term?
Nordvig: "We haven't changed our forecast on dollar/yen. Our medium-term target is 85 and it might have time to get there. But the overall direction in the medium term is for the dollar to rise."
"Overall, I think we have seen the low in dollar/yen at 76.25 yen."
(Editing by Jan Paschal)