The yen rose on Wednesday after a newspaper reported that the Bank of Japan plans to increase its monitoring of carry trades, which have helped push the Japanese currency to 10-month lows against the dollar.
Business daily Nihon Keizai said the BOJ was concerned about the trend in which investors borrow yen cheaply to invest in higher-yielding assets overseas. Playing down the newspaper report, a BoJ spokesman told Reuters that the central bank was not specifically beefing up its monitoring of such carry trades.
Traders said some in the market used the report as a further excuse to cut long-dollar positions ahead of key US inflation data later in the day. "People were a bit surprised," said Hidenori Kato, head of forex sales and trading at Societe Generale in Tokyo.
Investors also kept an eye on developments in North Korea after NBC News reported that US officials said North Korea's military had told China it intended to carry out more underground nuclear tests. The dollar was at 118.60 yen, down from 118.75 yen in late US trade but off the day's low of 118.38 yen. It marked a 10-month high of 119.88 yen late last week.
The euro was slightly lower on the day at 148.75 yen after slipping to a 3-week low around 148.50 yen on the newspaper report. That was well down from the record high of 150.73 yen struck at the end of August. Against the dollar, the euro was little changed at $1.2545. The carry trade report followed news earlier in the week that Russia's central bank planned to increase the yen share of its foreign exchange reserves, highlighting the risk that speculators could rush to cover a massive build-up of short-yen positions.
Dealers said the BoJ news was not fresh, with the minutes of its August monetary policy meeting having quoted some members as saying it should look into the market impact of yen carry trades. BoJ Assistant Governor Akinari Horii also said in a Reuters interview last week that the central bank was keeping an eye on carry trades, saying that, including retail investors, there were at least "a dozen trillion yen" of such trades in the market.
The dollar had already been undermined on Tuesday after a bout of US economic data, including a mixed reading for producer prices in September, did little to clarify whether the Federal Reserve's next move will be to cut interest rates.
Waning expectations of a Fed cut from the current 5.25 percent has fuelled a rally in the dollar. Lower rates would reduce the dollar's competitive edge against higher-yielding currencies.
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