The dollar retreated from a 9-month high against the yen on Monday as investors such as macro funds booked profits from a recent rally, while the euro dipped but stayed near recent highs before a liquidity injection by the European Central Bank. The dollar rose to 81.661 yen in early Asian trade, a gain of more than 7 percent since the start of month, before easing back to 80.57 yen after failing to breach a reported options barrier at 82.00 yen.
Traders cited profit-taking by leveraged investors and euro/yen selling by Japanese exporters. Although most expect dollar/yen to rise further in the long term, some believe the dollar may have limited scope to gain much above 82 yen short-term given there is a possibility of more monetary easing by the US Federal Reserve.
The dollar's rise versus the yen has tracked a widening spread between short-term US and Japanese yields after unexpected monetary easing in Japan earlier this month, coupled with data showing signs of improvement in the US economy. "There is a good correlation between US and Japanese two-year yield spreads, and there is no reason for US yields to ramp up from here unless the data gets much better," said Gavin Friend, currency strategist at nabCapital.
Dollar buying accelerated after it broke 80.94 yen on Friday, taking it above the weekly Ichimoku cloud level, a closely watched technical indicator. The dollar has not closed above that indicator since 2007. Commonwealth Bank of Australia raised its dollar/yen forecasts to 90 yen by the end of September and 92 yen by year-end on the expectation that Japan's terms of trade to deteriorate in the coming months.
Some, though, remain sceptical the recent move marks the start of a long-term uptrend in dollar/yen. "For dollar/yen to trade higher you need to see interest rates in the US and other countries outside of Japan move higher. This would be the trigger for long-term weakness, but it is not the case yet," said Richard Falkenhall, currency strategist at SEB in Stockholm.
The common currency climbed to 109.915 yen, the highest since October 31, before dropping to 107.76 yen, down 1.1 percent on the day. The euro was down 0.45 percent on the day against the dollar at $1.3392, with traders citing eastern European names selling. The euro may be influenced by a reported options expiry on Monday at $1.3400. The euro stayed not far from a 2-1/2 month high of $1.3486 set on Friday, with more gains possible before the ECB's second offering of unlimited 3-year loans to banks in a longer term refinancing operation (LTRO) on Wednesday.
A Reuters poll of euro area bank traders predicts banks will take 500 billion euros, close to the 489 billion borrowed in the first deal just before Christmas, and that this will be the last such operation. NabCapital's Friend expects the euro to rise towards $1.37/$1.38 over the next couple of weeks due to the LTRO auction, optimism that the Greek debt problems will be stabilised and better global economic data. The dollar index was up 0.3 percent at 78.581, though it stayed not far from Friday's trough of 78.220.