February 12, 2013 / 6:56 AM / 5 years ago

FOREX-Yen claws back some losses; shrugs off N Korea nuclear test

* Treasury’s Brainard says U.S. supports Japan’s efforts to end deflation

* Forex market shrugs off news of N. Korean nuclear test

* Investors await G20, BOJ meetings this week for signals on direction

By Lisa Twaronite

TOKYO, Feb 12 (Reuters) - The yen clawed back some its losses in Asian trading on Tuesday from its plunge in the previous session after a U.S. Treasury official implied tolerance of a weaker Japanese currency as a side-effect of efforts to defeat deflation.

Currency markets largely shrugged off news that North Korea conducted a third nuclear test.

The yen spent most of the Asian session wallowing in a narrow range around its lows before some investors took profits on dollar and euro gains late in the session.

“Today we have no strong new material to sell the yen more, so that’s why I think it’s natural to buy back the Japanese yen close to the London session,” said Masashi Murata, a currency strategist at Brown Brothers Harriman in Tokyo.

The dollar was buying 93.94 yen, down 0.4 percent from late North American trade on Monday when it rose as high as 94.465 yen on the EBS trading platform, its highest level since May 2010. Strong resistance, as well as options positions and stop-loss orders, was said to lie at 94.50 yen.

The euro lost 0.5 percent to 125.70 after it jumped 2 percent against the Japanese unit on Monday. It hit a nearly 3-year high of 127.71 yen on Wednesday last week.

U.S. Treasury Undersecretary for International Affairs Lael Brainard said the United States supports Japanese efforts to end deflation and re-invigorate growth.

“It’s a tacit way of saying, we don’t have a problem if the result is a weaker yen,” said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co. in New York.

“I think the yen’s weakening is a function of (playing) catch-up,” and not Japan resorting to deliberate devaluation of its currency, he said. “It’s the market’s way of saying, we’re convinced there is a movement afoot to reinflate Japan.”

Brainard stressed that the Group of 20 nations needs to deliver on the commitment to move to market-determined exchange rates and refrain from competitive devaluation.

Her remarks came ahead of a meeting of euro zone finance ministers on Monday and the G20 meeting later in the week, which are likely to focus on whether some countries are deliberately trying to weaken their currencies.

Japanese Finance Minister Taro Aso told a news conference after a cabinet meeting on Tuesday that Japan would tell the G20 that its monetary and economic policies are aimed at beating deflation.

Against a backdrop of rising rhetoric about a currency war, the Group of Seven nations are considering issuing a statement this week reaffirming their commitment to “market determined” exchange rates, two G20 officials said on Monday.

France said on Monday that euro zone finance officials should discuss the rising strength of the euro, but several ministers played down the issue and the G7 was expected to call for “market-determined” exchange rates.

The euro also benefited from comments from European Central Bank council member Jens Weidmann, who said discussions about an overvaluation of the euro are simply a diversion from governments’ task of sorting out their economies. He added that a currency policy aimed at weakening the euro would lead to higher inflation.

Against the dollar, the euro slipped 0.2 percent to $1.3381 , closer to its Feb. 8 low of $1.3353 and was well off its 15-month peak of $1.3711 set on Feb. 1.

Also this week, the Bank of Japan will hold its regular meeting on Wednesday and Thursday, and is expected to keep monetary policy steady for now.

Still, markets are pricing in more easing to come as the government of Prime Minister Shinzo Abe continues to maintain steady pressure on the central bank to take bold action to achieve its new 2 percent inflation target.

The Australian dollar fell 0.3 percent to 96.33 yen , moving away from its four-and-a-half year peak of 97.42 set a week ago.

Against the U.S. dollar, the Aussie slipped 0.4 percent to $1.020 after falling to 1.0238, its lowest level since Oct. 23.

The People’s Bank of China has been a regular buyer of the Aussie, but with China closed for most of this week for the Lunar New Year holiday, it may be especially vulnerable to a selloff, said Boris Schlossberg, managing director of FX strategy at BK Asset Management

A break below $1.0250 suggests a bearish technical development and may open the path to a test of $1.0150, he said in a note to clients.

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