NEW YORK: The yen rose on Thursday to its strongest levels against the US dollar and euro since the Bank of Japan embarked on an aggressive economic stimulus in April, as a slide in Japanese stocks triggered an unwinding of bets the currency would weaken.
Investors, sensing a wavering of the BOJ's commitment to the plan when it failed to announce new stimulative measures earlier this week, sent the yen soaring and stocks plunging. Those moves are the exact opposite of what the central bank desired from the markets when it launched its plan.
Additionally, price volatility has increased amid speculation of just when the US Federal Reserve might start to reduce its monetary stimulus, which helped lift US share prices to record highs in May.
The greenback pared losses on US economic data showing better-than-expected retail sales in May and a drop in the number of new claims for jobless benefits, but the data was not enough to reverse the trend.
"I think today's retail sales data in particular, but also jobless claims, were a positive for growth but not enough to push the Fed to act in June, but rather give them more time for a potential move in September," said Paresh Upadhyaya, director of currency at Pioneer Investments, with $208 billion in assets under management. Pioneer is a unit of Italy's Unicredit.
Japan's Nikkei 225 benchmark index has fallen for the last four weeks after a meteoric rise of more than 75 percent from November through May.
Uncertainty over central bank monetary policy led investors to unwind hedges taken out so that they could benefit from rising stocks and avoid being hurt by a weaker yen.
Heading into Friday's Tokyo trading session, June Nikkei stock futures pointed to a weak open, with contracts traded in Chicago down 65 points at 12,935.
The US dollar fell as low as 93.78 yen, its weakest point since April 4. The greenback last traded at 95.12 yen, down 0.92 percent on the day.
The euro slid 0.72 percent to 127.16 yen, moving back above the 100-day moving average after breaking down in Asian trade.
Given that the Nikkei has provided a lead on dollar/yen trading there is nothing to stop the bearish price action in the near term, according to BNP Paribas.
"We think this rout will eventually provide good opportunities to sell yen if you believe the power of policymakers in determining markets," BNP said.
Analysts said the yen, which generally rises in times of financial turmoil, was gaining on worries that the aggressive policies of Japanese Prime Minister Shinzo Abe were yet to boost the economy and stave off deflation.
"The dollar squeeze in the last few days, despite stronger US yields, has left a lot of market participants dazed and confused," said Alvin Tan, foreign exchange strategist at Societe Generale.
"The best explanation we can offer is that there is a broad squeeze in market positions, and we started this risk-off move with a market that was long dollars."
Reflecting uncertainty about near-term direction, dollar/yen one-month implied volatility, a measure of expected price swings and a gauge of options pricing, jumped to its highest level in more than two years.
Market participants slashed hefty bets on gains in the dollar, which had been taken out on expectations the Fed would soon scale back monetary easing.
The dollar lost 0.33 percent against a basket of currencies and was last at 80.68, not far from a nearly four-month low of 80.50 hit earlier in the day.
The Australian dollar, meanwhile, was one of the best performers of the day, last trading up 1.8 percent at US$0.9653.
The euro hit a near four-month peak of $1.3390, but traders reported offers at $1.3400 and the euro trimmed gains to last trade up 0.22 percent at $1.3365.
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