The yen softened on Friday after Tokyo importers took advantage of its broad rally the day before, while risk currencies such as the Australian dollar were poised to end the week sharply lower on fresh concern about the health of the global economy. Manufacturing shrank for a fifth month in China, while factory activity in Germany and France, Europe's two biggest economies, suffered big and unexpected falls, data showed on Thursday, bolstering the yen and sending growth currencies down.
But on Friday the Japanese unit's underlying weakness was reinforced by selling by Japan importers, whose purchases of fossil fuels have surged as most nuclear reactors in the country were taken offline after the Fukushima disaster last year. "Importers who were late into the dollar rally have been very active since late New York trading, both in dollar/yen and in euro/yen," said Teppei Ino, currency strategist at Bank of Tokyo-Mitsubishi UFJ in Tokyo. The yen fell 0.4 percent to 82.85, slowly inching back towards this year's low of 84.19 hit earlier in March. Its rise on Thursday stalled ahead of resistance at the 23.6 percent retracement of its recent fall at 82.28.
The dollar's staggering rally on the yen lost impetus as investors booked profit on the greenback and as Japan posted a surprise trade surplus on Thursday. Other currencies also recouped some of their overnight losses on the yen despite Asian stock markets turning red, suggesting investors are awaiting more definite signs of a global slowdown before shunning riskier assets more aggressively.
"The rally in risk assets has been extraordinary this year, so in a way it's positive that weak data is giving traders an opportunity to take profit. If the recent falls end as a mere correction, the subsequent rally would be stronger thanks to this pullback," Ino said. Reflecting this view, the euro stayed surprisingly resilient against the greenback, bouncing off a low of $1.3133 to $1.3195. But some analysts said the single currency could still fall against the dollar, partly due to the recovery in the US economy.
Traders said yields were prone to pullbacks like the one seen on Thursday, but should rise further if the US recovery strengthened, providing support for the greenback in the months to come. "We see scope for EURUSD to trade lower in coming weeks, based on the risk that Treasury yields will overshoot to the upside relative to what we regard as realistic Fed policy expectations," BNP Paribas analysts wrote in a client note.