The yen surged on Friday as volatility in Japanese shares after a 7.3 percent plunge the day before spooked yen-sellers, prompting a wholesale unwinding of bets to profit from the Bank of Japan's monetary easing. The yen edged near a two-week high on the dollar and seven-week highs against the Australian dollar, with some traders speculating selling was mostly from algorithm players, who often execute trades based on correlation patterns of the past.
The dollar fell 0.3 percent to 101.63 yen, and was down 2.0 percent from Wednesday's 4-1/2-year high of 103.74 yen. A break of its two-week low of 100.83 yen hit on Thursday could open the way for a test of the 100 yen mark. The Nikkei share average ended up 0.9 percent after falling sharply at one point in a replay of its dive on Thursday, the biggest percentage fall in two years.
"This is deja vu. People were afraid and selling the dollar," said a trader at a Japanese bank, referring to the Nikkei's tumble on Thursday. The yen has dropped sharply this year and the Nikkei has surged around 45 percent on the back of Japanese Prime Minister Shinzo Abe's prescription of aggressive monetary and fiscal stimulus. Many traders view the latest setback for dollar/yen and Japanese shares as merely a correction rather than a sign that the magic of "Abenomics" was wearing off.
"Adjustments are an important part of the market. You can't have a one-way move forever. So yesterday's big adjustment was necessary, I think. But if the Nikkei rebounds, it will become easier to buy the dollar," said Bart Wakabayashi, head of forex at State Street Global Markets. Junya Tanase, chief currency strategist at J.P. Morgan Chase, said the dollar fell about three percent on average in four instances during the bull market of 2003-2007 when Japanese shares declined more than four percent.
Analysts also note that the dollar is generally being supported by expectations that the US Federal Reserve is inching towards tapering its bond buying after Chairman Ben Bernanke on Wednesday suggested this could happen in one of the next few policy meetings. "The battleground has shifted to the US economy. The market will scrutinise whether the US economy is strong enough for the Fed to taper its bond buying," said Katsunori Kitakura, associate general manager of market making at Sumitomo Mitsui Trust Bank.
The dollar index, which measures the currency's value against a basket of six other major currencies, stood at 83.765, almost flat on the day and near a three-year high of 84.498 hit on Thursday. The euro eased 0.1 percent to $1.2917, though it kept some distance from a six-week low of $1.2796 hit last week, with immediate focus on Germany's Ifo business sentiment index due at 0800 GMT.
The growing view that the Fed will take its foot off the bond-buying scheme pedal is hurting the Australian dollar, which has been a magnet for funds looking for higher yields. The Aussie fell 0.5 percent to $0.9685, with its 2012 low of $0.9581 seen as critical support. On Thursday, it fell to as low as $0.9593. The Aussie also fell more than one percent against the yen to 98.34 yen, having fallen as low as 97.31 yen on Thursday, its lowest level since April 4.
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