March 22, 2013 / 3:20 AM / 5 years ago

FOREX-Cyprus debacle keeps euro in doldrums, yen steadies

* Yen steadies after short positions squeezed on Thurs

* Euro pinned near 4-mth lows vs USD on Cyprus uncertainty

* U.S. data points to growing momentum

By Sophie Knight and Ian Chua

TOKYO/SYDNEY, March 22 (Reuters) - The yen steadied on Friday after investors scrambled to cover bearish positions in the previous session after the new Bank of Japan governor played down the chance of an emergency meeting, while glum economic news and Cyprus debt crisis kept the euro under pressure.

The dollar held firm versus the yen at 94.95 yen by late morning in Asia, after having dropped roughly 1.2 percent on Thursday. The euro edged up 0.2 percent to 122.58 yen , regaining a bit of ground after having slid 1.5 percent on Thursday.

Investors betting on new BOJ governor Haruhiko Kuroda calling a policy review earlier than the scheduled one on April 3-4 reversed their yen short positions after he made no mention of such a meeting at his inaugural news conference on Thursday.

“Kuroda has repeatedly said he’ll do as much as he can to reach the 2 percent inflation target, so an emergency meeting seemed quite plausible for a lot of people,” said Makoto Noji, senior strategist at SMBC Nikko Securities.

“But what the market has really put its chips on is easing on a scale that exceeds what has been reported in the media. That means there is a lot of room for disappointment,” he added.

Despite its gains, the Japanese currency remained contained in a well-worn range against the euro on Friday and was not far off a 3-1/2 year trough against the greenback of 96.71 set last week.

Over the next few days, yen weakness could be tempered by repatriation flows as the end of Japan’s fiscal year on March 31 looms, traders said.

“We see further rallies above 96.00 meeting with increased resistance, while over the coming months we expect USD/JPY to eventually slide back towards 90.00,” said Vassili Serebriakov, strategist at BNP Paribas.

The U.S. dollar is up around 9 percent against the yen this year, while the euro is 7 percent higher, highlighting the extent of bearishness already priced in.

However, the Japanese currency’s slide against the euro hit an obstacle this week as Cyprus has struggled to find a solution to its debt crisis, with debate raging over whether depositors should be lumped with a tax to raise the billions of euros it needs to secure an international bailout.

Trying to speed things along, the European Union gave Cyprus till Monday to make a final decision. A failure to do so could mean a collapse of its financial system, which could in turn lead to an exit from the euro currency zone.

Adding to the gloom, Standard & Poor’s cut Cyprus’s credit rating deeper into junk status and a survey showed the euro zone’s economic downturn has deepened this month, even before Cyprus’s bailout debacle.

However, the euro edged up to $1.2914, moving away from a 4-month trough around $1.2843 set on Tuesday.

Lending support was higher demand and lower costs at a Spanish bond sale, suggesting yield-hungry investors are not expecting the financial turmoil in Cyprus to spread to other parts of the euro zone.

Still, analysts said the risk for the euro is to the downside.

“While we expect a constructive solution to emerge in the coming days, EUR/USD is likely to continue to face headline risk as capital controls will likely need to be imposed once banks re-open. There is also near-term risk for the euro from softer economic data,” BNP’s Serebriakov added.

With no major economic data due in Asia on Friday, the focus is squarely on developments in Cyprus, where lawmakers will debate emergency legislation tabled by the government later on Friday to confront the island’s financial crisis.

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