Rising US bond yields on Tuesday lifted the dollar above 82 yen for the first time since Japan's recent currency intervention, and technical indicators suggested the greenback may be poised to extend those gains. The euro also rose to its highest level against the yen since May as markets braced for higher eurozone interest rates.
But the single currency was flat against the dollar as another Federal Reserve official mused about the need to tighten monetary policy. The dollar rose to 82.51 yen, its highest in more than two weeks and above the 81.98 peak of March 18, the day Japanese authorities intervened to stop runaway yen gains. A wider gap between US and Japanese yields helped, with the two-year US Treasury yield up eight basis points at 0.81 percent. It was up 21 basis points since March 15.
A dollar close above 81.50 yen in coming days could signal a re-test of 83.30 yen, a level hit immediately after the March 11 earthquake, followed by the February high of 83.98, said BNP Paribas technical strategist Andrew Chaveriat. "The 82.25-82.50 area is key, and if we get above there, you could see a substantial retracement of the overall February decline," he said.
The euro rose 1 percent to 116.24 yen, a 10-1/2-month high. The yen hit a record high after the earthquake and tsunami on speculation the diaster would force Japanese investors to liquidate overseas assets and bring money home. But Steven Englander, head of G10 strategy at Citigroup, said "it is becoming increasingly clear that repatriation flows (to Japan) are not panning out and if anything will be limited."
He said recent Bank of Japan data suggests investors' share of foreign assets was already low before the quake. A steady rise in US yields gained traction this week as several Fed policymakers said the central bank would have to start tightening monetary policy soon to avoid inflation.
St. Louis Fed President James Bullard, a non-voting member of the Fed's rate-setting committee, said Tuesday the US economy was strong enough to curtail the Fed's $600 billion bond-buying program by $100 billion. That weakened the euro briefly, though it recovered from $1.4045 to trade up 0.1 percent at $1.4096. But analysts said markets still expect the ECB to beat the Fed by hiking rates next week and have noted that Fed officials do not all agree.
Chicago Fed President Charles Evans, unlike Bullard a voting member, said late Monday that the Fed should complete its bond-buying program as planned. However, if the euro were to close below $1.3994, an ascending channel base, that could signal a significant price correction, said RBC Capital Markets strategist George Davis. That could expose $1.3754, followed by the February low of $1.3428, he said. On the upside, heavy options-related barriers around $1.4250 were expected to cap gains, but a break of that level may see a test of the November high of $1.4283.
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