The yen's rally was firmly intact on Monday despite the G7 singling out excessive volatility in the Japanese currency, while the dollar hit a two-year high versus the euro as investors shed exposure to risk. The yen was hovering below 13-year peaks against the dollar but hit its highest since May 2002 against the euro.
Finance authorities of the Group of Seven leading countries issued an unscheduled statement saying it was concerned about recent excessive volatility in the yen and would continue to monitor markets closely, and cooperate as appropriate, raising the spectre of co-ordinated currency intervention.
The yen has surged sharply as investors unloaded carry trades, which use the low-yielding yen to buy everything from higher-yielding currencies to stocks and commodities. Such trades have collapsed in the past few weeks as market players have been forced to sell many assets to raise cash.
"Banks are cutting back on lending, that has consequences for emerging markets and asset prices generally. I can't see anything on the immediate horizon to break the current cycle," said Derek Halpenny, European head of FX research at BTM-UFJ in London. "That's the real problem for the authorities," he added.
The yen has struck a 13-year peak against the dollar, a six-year peak against the euro and many other milestones in its roughly 20 percent surge on a trade-weighted basis this month. Japanese finance minister Shoichi Nakagawa said on Monday that he was watching currencies with "great interest".
But some analysts said that while the possibility of concerted currency intervention was closer, it may still take time for authorities to act. "It (G7 statement) was hardly a warning shot, it was more like saying we are aware of recent volatility ... we're not there yet for intervention," said Geoffrey Yu, currency strategist at UBS in London.
While not ruling out intervention by Japanese authorities if the dollar sinks to 80-85 yen sharply, "the likelihood is that everything will be done through the G7 framework, that's what the US Treasury wants," he added. At 1200 GMT, the dollar was down 1.1 percent against the yen from late US trade last week to 93.21 yen, having risen near to 94.50 yen after the G7 warning.
On Friday the US currency slid to a 13-year low of 90.90, according to Reuters data. The euro was down 2.3 percent at 116.20 yen, after hitting a near 6-1/2 year low of 113.64 yen. Against the dollar, the euro dropped more than 2 percent to a near 2-1/2 year low of $1.2335. The Australian dollar shed 2.9 percent to $0.6052, back near a six-year low. Against the yen, the Aussie fell 3.9 percent to 56.43 yen after sinking to 55.11 yen on Friday - the lowest since it was allowed to trade freely.
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