January 16, 2013 / 9:21 PM / in 5 years

FOREX-Yen rises vs dollar; ECB's Nowotny comment briefly boosts euro

* Dollar/yen under pressure from profit-taking
    * Yen direction hinges on BoJ meeting next week
    * ECB's Nowotny reassures market after Juncker comments

    By Gertrude Chavez-Dreyfuss
    NEW YORK, Jan 16 (Reuters) - The yen advanced against the
dollar and euro for a second straight session on Wednesday as a
recent warning from a Japanese official about excessive yen
weakness continued to underpin the currency.
    The euro, meanwhile, slipped for a second consecutive day
against the dollar on persistent concerns about the region's 
    Europe's shared currency briefly bounced after European
Central Bank member Ewald Nowotny said the euro's exchange rate
was "not a matter of major concern." That was in stark contrast
to comments from Eurogroup head Jean-Claude Juncker, who on
Tuesday prompted investors to sell the euro by saying it was
"dangerously high."  
    The focus, however, remained squarely on the yen, which has
captured investors' attention the last two months. Forecasts of
aggressive action by the Bank of Japan to weaken its currency
drove the dollar sharply higher in recent months, with the
greenback gaining nearly 11.3 percent in the fourth quarter of
2012 and 2.1 percent so far this year.
    However, after the yen hit a 2-1/2-year low of 89.67 yen to
the dollar this week, most believe it was poised to recoup
losses, with a correction ignited by Japanese Economics Minister
Akira Amari's comments on Tuesday. Amari cautioned that
excessive yen weakness could boost import prices and hurt
people's livelihoods. 
    "People are still looking for further yen weakness but there
has been a pullback in yen selling obviously due to Amari's
comments," said Brian Kim, currency strategist, at RBS
Securities in Stamford, Connecticut.
    "Investors haven't really seen hard decisions from the
Japanese government about weakening the yen so there are some
questions there."
    Market participants have put on big bets against the
currency with the new government in Tokyo very vocal about
pressing the central bank to tackle deflation, calling for a 2
percent inflation target.
    The Bank of Japan is widely expected to agree to such a
target at its policy meeting on Jan. 21-22, although some
traders said there could be selling in dollar/yen afterwards,
based on "buy the rumor, sell the fact."
    The dollar last traded at 88.39 yen, down 0.5 percent
on the day. Traders cited supporting bids at 87.70 to 87.80.
    Still many analysts believe the yen's decline in recent
weeks has been quite extreme and its rally this week could
persist in the short term.
    "For the time being, we think the yen's fall has been too
far and too fast, and look for corrective yen strength before a
renewed decline," said Nick Bennenbroek, head of currency
strategy at Wells Fargo Bank in New York.
    He added that yen positioning was already extended, with
speculative yen shorts more than 80 percent of their recent
December peak. Bennenbroek believes the dollar could fall to 87
yen over the next three months, before a gradual strengthening
over the longer term to a rate of 90 over the next 12 months.
    Wednesday's sell-off in dollar/yen dragged all of the major
currencies lower. 
    The euro also fell against the yen to trade down 0.6 
percent lower to 117.44 yen. The euro had climbed to
its highest in 20 months this week after the ECB dashed
expectations of a near-term rate cut. 
    "What we are witnessing is deleveraging," said Kathy Lien,
managing director of FX strategy for BK Asset Management in New
    "Over the past two months, with the blessing of Prime
Minister (Shinzo) Abe who pledged to ease monetary policy
aggressively, many investors jumped back into yen-funded carry
trades and now they are taking profits below key levels after
Japanese officials expressed concerns about yen weakness," she
    The euro slipped 0.1 percent against the dollar to
    Weak economic data from Europe highlighted the disparity
with the U.S. economy. Demand for new cars in Europe fell to a
17-year low in 2012, and even the German economy is suffering
from the euro zone recession.  
    If economic data continues to weaken, the ECB may opt to cut
rates, a negative for the euro.
    In the United States, muted inflation pressures should give
the Fed more room to prop up the economy by staying on its
ultra-easy monetary policy path. U.S. consumer prices were flat
in December. 
    The euro had rallied smartly in the days following last
week's ECB meeting. ECB President Mario Draghi played down
expectations of another rate cut and painted a more positive
outlook for the euro zone economy. 
    His supportive comments sent the euro to an 11-month high of
$1.3403 this week, according to Reuters data.

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