SYDNEY (Reuters) - The dollar pulled back slightly from a three-month peak against the yen on Tuesday as the impact of Japan’s massive intervention faded a touch, while the euro came under renewed pressure amid growing doubts over a plan to contain Europe’s debt crisis.
The dollar stood at 78.30 yen, having risen as much four big figures to 79.55 on Monday in the wake of a record one-day intervention estimated by some market players to be anything from $90 billion to $130 billion.
The options market, however, showed bets on the yen’s gains against the dollar on a one-month horizon had not eased significantly, reflecting the market’s belief that the impact of intervention would not last more than a few weeks.
Steve Barrow, strategist at Standard Bank, said if the intervention was not repeated, just as the case back in August, then dollar/yen could quickly return to the 75 region.
“We feel that the BOJ needs to vary the tactics here and would be better served by intervening intermittently in order to hang on to the gains it has made so far,” he said.
“Even this tactic would not stop dollar/yen falling to our target of 70, but at least it might mean that this is a long-term possibility rather than a near-term probability.”
One of the reasons supporting underlying demand for the yen is that it is the least unattractive among the G3 currencies.
Indeed, despite last Thursday’s euro zone summit deal, doubts about how those measures could be implemented continued to haunt the common currency.
News that the Greek prime minister has called an unexpected referendum on a new EU bailout deal for his debt-ridden country coupled with persistent pressure on Italian bonds renewed worries about the region.
The euro was at $1.3840, having reversed all of the gains to $1.4247 made last Thursday after the debt deal was announced.
“The depth and breadth of unanswered questions from Thursday’s EU deal, the spectacle of euro-peripheral bonds yields/yield spreads mostly higher Monday and general support afforded the USD from the BOJ’s intervention, ensured EURUSD traded down in fits and starts throughout Monday,” BNP Paribas analysts wrote in a note.
Immediate support for the common currency is at the overnight low of $1.3827, a level representing the 38.2 percent retracement of the October rally from $1.3144 to $1.4247.
The Japanese intervention coupled with renewed euro weakness saw the dollar index rally to 76.503, up 1.9 percent. That was the largest one-day gain since late 2008.
This move also weighed on commodity currencies. The Australian dollar fell to $1.0545 from the recent high of $1.0753.
The immediate focus for the Aussie is the Reserve Bank of Australia’s rate decision due at 0330 GMT, where many analysts expect a 25 basis point rate cut following recent benign inflation data.
Should the RBA hold rates steady, the Aussie could regain some of the overnight losses, traders said. The market will also be keeping an eye on China’s manufacturing data due around 0100 GMT for the latest signs of whether the world’s second biggest economy is on track for a soft landing.
The U.S. Federal Reserve starts its two-day policy deliberations later on Tuesday, while the European Central Bank holds its meeting on Thursday, ahead of key U.S. jobs data on Friday.
Editing by Wayne Cole