The yen rebounded from multi-month lows against the dollar and euro on Monday as a weeks long sell-off halted ahead of an ECB debt sale that could test investors' appetite for risk. The yen had been on a steady downward trajectory ever since the Bank of Japan eased monetary policy earlier this month. Japan's trade deficit, interest rate differentials, an improving US economy and higher oil prices have also weighed on the yen.
The yen has been pummelled in February and has been the weakest performing major currency, losing about 8.15 percent in value against the euro, 5.5 percent versus the dollar and 10.5 percent against the Norwegian krona. "Obviously we had a very strong move down in the yen and the crosses and we did not get a meaningful pause for several weeks, so we got that pullback today," said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey.
The dollar rose to a nine-month high of 81.61 yen in early global trade, according to Reuters data, before surrendering gains. It was last down 0.6 percent at 80.52, but the dollar remained on track for its biggest monthly advance since December 2009. Still, Commonwealth Bank of Australia raised its dollar/yen forecasts to 90 yen by the end of September and 92 yen by year-end on expectations Japan's trade terms will deteriorate in the coming months.
But many are 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 euro climbed to 109.89 yen, according to Reuters data, the highest since October 31, before sliding off the highs to trade at 107.92, down 0.9 percent. Later this week, US Fed Chairman Ben Bernanke may hint at the possibility of another round of bond-buying when he testifies before Congress. The euro eased against the dollar but stayed near recent highs before an expected liquidity injection by the European Central Bank (ECB) on Wednesday.
The central bank will offer its final 3-year tender at fixed low rates to European banks looking to recapitalize amid ongoing concerns of a "mild recession" in the 17-nation currency bloc. The euro was last down 0.4 percent at $1.3402. While that is below the 2-1/2 month high of $1.3486 set on Friday, more gains are possible before the ECB's second offering of unlimited 3-year loans to banks in a longer-term refinancing operation (LTRO).
"At least for now, a large ECB LTRO could be positive for the euro as the market will focus on the positives and it will increase risk appetite," SEB's Falkenhall said. A Reuters poll of economists showed banks will borrow 492 billion euros, close to the 489 billion borrowed in the first deal, just before Christmas.