The yen fell against the dollar and euro on Friday and looked vulnerable to further selling on expectations that the Bank of Japan will ease monetary policy aggressively in coming months. The euro was steady versus the dollar after euro zone flash PMI numbers were broadly in line with expectations. Sentiment towards the shared currency has picked up slightly following a successful Greek debt buyback and after an agreement was reached on a single euro zone banking supervisor.
The dollar climbed 0.2 percent to 83.77 yen, having earlier risen as high as 83.96, its highest level since March 21. It was not far from its March 2012 peak of 84.187, which is seen as a major resistance level. Traders cited an options barrier at 84 yen with the options market also showing increasing bias for more yen weakness with investors increasingly buying yen puts.
"The yen is the only game in town with volumes thinning out," said Peter Allwright, head trader at fund manager house RWC Partners. "Investors are short yen heading into the election and even in the longer term we expect the yen to weaken." Bets the yen will weaken have risen significantly as Japan looked set to get a prime minister keen to push for more money printing by the central bank to stimulate the moribund economy. Japanese media reported the conservative Liberal Democratic Party (LDP) is set for a resounding victory in elections on Sunday, cementing speculation LDP leader Shinzo Abe will be in a strong position to push for bold easing.
"Abe has been making pretty strong comments about inflation targeting and if we look at the economy Japan needs a lower currency without a doubt," said Maurice Pomery, managing director at consultants Strategic Alpha. The dollar has risen 5.5 percent against the yen in the past month and technically there are signs the pair has risen too fast in a short period of time, with its relative strength index standing well above the "overbought" mark of 70.
The euro rose to an eight-month high of 109.98 yen, and was on track to end the week almost 3 percent higher on the yen. It was last trading at 109.59 yen, up 0.2 percent on the day with option barriers reported at 110 yen. The euro was also on track for its biggest weekly gains against the dollar in three weeks. It rose to a high of $1.3120, its highest level in more than a week and was last trading at $1.3087, close to flat on the day. Traders cited offers to sell from central banks at $1.3135/40 with reported option barriers at $1.3150 and $1.3200.