The yen was on the back foot against higher-yielding currencies as rising stocks and commodity markets encouraged a pick-up in risk-taking on Wednesday, while the dollar broadly held its ground. Traders and analysts in Japan were still chewing over steps by the central bank the previous day to attack deflationary pressures.
Which left many disappointed, and were keen to hear the outcome of a meeting between Prime Minister Yukio Hatoyama and Bank of Japan Governor Masaaki Shirakawa expected later. Many in the market doubted the Bank of Japan's new 0.1 percent funding operation, aimed at keeping short-term rates down, could slow a fall in the dollar for long and were looking for hints on what Japanese authorities might do next.
The greenback hit a 14-year low of 84.82 yen last week as concerns over debt problems in Dubai saw investors unwind risk trades funded by the yen, which pushed the Japanese currency up. Traders said Japanese exporters, nervous they would not get better exchange rates, were ready to sell into dollar and euro rallies against the yen that could create headwinds to gains.
The dollar stood at 87.00 yen, up 0.4 percent on the day, but struggled to stay above that level. Some traders said if it could move back above 87.50 yen, a resistance area in the past two sessions, that could herald a stronger push higher. The euro rose 0.4 percent to 131.28 yen and firmed to $1.5094 after gaining 1 percent and 0.5 percent respectively the previous day. It was near a recent 16-month high of $1.5145 set on trading platform EBS, with strong trendline support seen at $1.4900 and then at $1.4860.
The dollar index, a measure of its strength against a basket of six currencies, was steady at 74.411, not far above last week's 16-month low of 74.17. The BoJ said that after an emergency meeting on Tuesday it would provide 10 trillion yen ($115 billion) in three-month funds at a fixed rate of 0.1 percent, relieving government pressure to act against deflation and avert another recession.
Tuesday's decision was seen as a way to avoid a return to a narrow form of quantitative easing, under which the BoJ slashed rates to zero and flooded markets with cash in 2001-06.
Yen borrowing costs did fall, with the three-month interbank rate reaching its lowest level since May 2006 on Tuesday to fix at 0.29375 percent. But it remained above the equivalent dollar rate, which was fixed at 0.25531 percent, and traders were sceptical this would support the dollar for long, with some readying to go long yen once the dollar rises above 87.00 yen.
A BoJ official said the central bank would not rule out any policy options and it must be aware of the risk to inflation expectations if the yen's rise was seen to harm the economy. The Aussie rose 0.3 percent to $0.9278, after a jump of more than 1 percent on Tuesday. Part of the rise was due to the third straight monthly hike in the cash rate by the Reserve Bank of Australia and higher gold prices. It gained 0.5 percent to 80.62 yen.