The yen eased off its bullish run against major rivals on Friday, but the market expected further gains as speculation mounted that the Japanese authorities may be stepping back from aggressive intervention.
Traders likened the yen's pause to the calm after a storm, noting it was common for the market to stabilise in the wake of big fluctuations such as those seen in the dollar/yen this week.
On growing suspicions that the Ministry of Finance (MoF) may be looking to cut back on intervention, the Japanese currency surged by two yen on Thursday to one-month highs around 106.35 yen - about five percent above five-month lows plumbed less than two weeks ago.
The dollar was resting at 107.11 yen after briefly fighting back against the Japanese unit, pushing up to as high as 107.30 yen in early trade.
Market opinion was split as to whether the blip up had been driven by market intervention, although some traders pointed to the possibility that the Japanese authorities had been acting in the market all week, albeit at minimal levels.
Still, they said the yen was poised for more gains as the market was intent on testing the Finance Ministry's resolve.
Dealers said the dollar would likely take a run at the 105 level in the near term, although the authorities are seen keen by some to protect that level, at least until the end of March, when Japanese corporations close their books for fiscal 2003/04.
Fuelling speculation about a change in tone over Tokyo's dollar-buying intervention policy, Japan's Mainichi newspaper reported that the government planned to trim back intervention amid growing signs of an economic recovery.
Japanese policymakers found themselves trying to quash suspicions of a change in intervention policy.
The euro was sitting around 132.72 yen, up from late New York's 130.72 - its lowest since January 30.
Against the dollar, the euro was at $1.2391 slightly above late US levels.
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