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Yen Reverses Losses After Mixed Signals From Japan

Tuesday, 19 Feb 2013 | 5:40 PM ET
Ryan McVay | Photodisc | Getty Images

The yen rose against the dollar and euro on Tuesday as disagreement between Japanese officials raised doubts over how aggressively Japan will ease its monetary policy.

Japanese Finance Minister Taro Aso said Tuesday he was not considering buying foreign bonds as part of efforts to ease monetary policy, a day after Prime Minister Shinzo Abe said this was an option.

(Read More: Muto Leads as Japan PM Close to Choosing Nominee for BOJ Chief)

Expectations Japan will take further stimulative steps to fight deflation have driven the dollar up 8 percent versus the yen so far this year. But the pace of the yen's fall has slowed lately as investors waited to see if words will translate into action.

"The comments suggested that there may be growing differences between the prime minister and the finance minister, which could threaten the pace of policy easing going forward," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington, D.C.

FX Strategy
Michael Plavnik from Citi reverse engineered Japan's inflation target saying the yen will need to weaken 40-50% in the 2-year period with dollar/yen reaching 120.

The dollar fell 0.4 percent to 93.56 yen, hovering above chart support at 93.38 yen, the 200-hour moving average. It was well below a peak of 94.22 yen hit Monday after Japan escaped direct criticism from its G-20 peers over the weekend.

Choi Hee Nam, South Korea's director-general at its finance ministry, said that while Japan was not singled out at this weekend's Group of 20 meeting, its monetary and fiscal policies that have weakened the yen were not endorsed by the group and did spark controversy, according to Bloomberg News.

Some analysts see further near-term losses in the dollar against the yen, with investors hesitating to re-test last week's 33-month high of 94.42 yen, when it failed to breach a reported options barrier at 94.50.

The yen's fall could also slow as investors become wary of betting on further yen weakness until there is more clarity on who will become the next Bank of Japan governor.

Tokyo has delayed nominating a new governor for its central bank by a week, fanning talk of friction between the prime minister and the finance minister on the issue.

The euro was down 0.1 percent at 125.26 yen. Against the dollar, the euro was last up 0.3 percent at $1.3387, helped by upbeat data on German economic sentiment.

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The ZEW index rose to its highest since April 2010, beating even the highest forecast in a Reuters poll.

The euro moved further away from a three-week low of $1.3306 hit on Friday, with traders reporting bids at $1.3310-15.

Investors, however, grew cautious ahead of Italian elections this weekend, which should cap any euro rally.

"The euro has derived no obvious benefit from the better German data," said Bob Lynch, chief currency strategist at HSBC in New York. He cited several bearish technical indicators on euro/dollar, such as the five-day moving average close to crossing the 40-day moving average.

(Read More: Aussie Dollar at $1.30: Are You Kidding?)

All those indicators suggest more downside than upside risk for the euro against the dollar, Lynch said, and he would look to sell toward the $1.3400 area.

Europe's shared currency also rose sharply against sterling, gaining 0.6 percent to 86.78 pence on growing speculation that Britain could lose its triple-A credit rating.

The euro has come under selling pressure in the wake of recent data revealing a deeper-than-forecast euro zone recession and on concerns that Italy's Feb. 24-25 election could fragment parliament, potentially hampering the country's reform efforts.

The dollar index, meanwhile, last slipped to 80.49, down 0.2 percent, still within striking distance of the 80.727 six-week high hit on Monday.

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