The yen struck a 15-year high against the dollar and a nine-year peak against the euro on Tuesday as investors and speculators tested the resolve of Japanese authorities to stem the yen's steady rise. The yen rise accelerated as stop-loss sales were triggered in euro/yen at around 107 yen while traders cited macro hedge-fund selling of the euro against the dollar.
Falls in shares helped buoy the yen on the crosses while narrowing differentials between US Treasuries and Japanese government bond yields dragged the dollar down against the yen. Japanese Finance Minister Yoshihiko Noda declined to comment on the chance of currency intervention, saying only that recent currency moves were one-sided and disorderly moves could harm the stability of the economy and financial system.
Traders took those comments as a sign the authorities were not yet ready to act to curb yen strength. "Unless the Japanese step in with something more definitive, we will see speculative accounts drive the dollar/yen down to 80 yen," said Paul Robson, RBS Global Banking currency strategist.
"The 85 yen level was pretty important and now with that gone, dollar/yen falling to 80 is a real possibility. That will hurt the Japanese economy pretty hard, unless they do something more on the fiscal side or resort to more quantitative easing." The greenback struck a 15-year low of 84.15 yen on EBS, before inching up to 84.26 yen by 1123 GMT, still 1 percent lower on the day.
"The market knows full well that the options in front of the Japanese authorities are pretty limited," said Neil Mellor, currency strategist at Bank of New York Mellon. "Any intervention will have limited shelf life, so now the Bank of Japan has to formulate policies which can undermine the yen's strength. This will not be easy and we could still be headed towards the 105 yen mark for euro/yen."
The euro fell to 106.11 yen, its lowest since November 2001, having dropped past support at around 107.27 yen, the low hit in June. It was last at 106.37 yen, down 1.2 percent on the day. Technical analysts say the euro could be poised for a fall towards 105.00 yen, with interim support seen at 105.50 yen, around the low reached in September 2001. The 105.00 yen level, where Japanese authorities were reported to have intervened in November 1999, was also seen providing support.
The euro also fell to a six-week low against the dollar of $1.2602, opening the way to a fall towards $1.2522 and then $1.2479, daily lows from July. Traders said the chances Japanese authorities would take fresh measures in the coming weeks to stem the yen's rise had increased, particularly as the dollar approaches 80 yen.
Sources said the yen's surge on Tuesday had somewhat increased the previously negligible chances the Bank of Japan will ease monetary policy before its rate review next month. "Japanese policymakers will be desperate to prevent a break in dollar/yen down to 80 but that looks the trend," Chris Turner, head of fx strategy at ING, said in a note.