Yen slides after G7 helps BOJ intervene, drop likely to slow
The yen tumbled more than 3 percent on Friday after Group of Seven finance ministers agreed to immediately and jointly intervene against the Japanese currency's surge to a record peak, with Bank of Japan buying pushing the dollar above 81 yen.
Japanese Finance Minister Yoshihiko Noda said Japan agreed with central banks of the United States, Britain and Canada as well as the European Central Bank to jointly intervene in the currency market. Markets were caught off guard by the first joint action in over a decade, expecting Japan to have to act alone.
Traders said the Bank of Japan was immediately spotted buying dollars versus the yen, though it seemed to be meeting heavy offers. Each respective central bank agreed to intervene and sell the yen when their respective markets open.
Market players expected Japan and other central banks to keep intervening if the dollar threatened to fall back below 80 yen and make a run at the 76.25 all-time low struck this week. The G7 has long warned against excessive volatility in exchange rates.
But many traders were expected to need to unload dollars at higher levels and slow any advance, especially after Thursday's shocking plunge in dollar/yen that saw it collapse more than 4 percent in just an hour.
It is a positive surprise, said Mitsuru Sahara, chief FX manager at Bank of Tokyo Mitsubishi-UFJ in Tokyo.
The impact will be there, as it is difficult now to sell the dollar below 80 yen ... I think it is aimed at preventing a sharp plunge and bringing dollar/yen back up to levels before it started plunging, rather than trying to push it higher above 85 yen. I don't expect follow-up interventions to the upside.
The dollar's gains slowed after the initial burst higher, with Japanese exporters and traders stuck with long yen positions using the opportunity to unload. Some individual Japanese margin traders were also spotted selling dollars.
The rare G7 joint intervention capped a frantic week for Japanese markets that saw the Nikkei <.N225> suffer its worst two-day rout since the 1987 crash and the yen soaring as investors watched the country's nuclear crisis escalate.
The dollar jumped 3.3 percent on the day to as high as 81.50 yen on trading platform EBS, extending a rebound from a record low of 76.25 yen plumbed on Thursday.
The sell off in the previous session came after a break of the 1995 record low of 79.75 triggered a cascade of automatic sell orders, some tied to leveraged positions and structured FX derivatives, in thin trade between the U.S. and Asian trading days.
The yen has climbed steadily since last week's earthquake, as Japanese and international investors closed long positions in higher-yielding, riskier assets such as the Australian dollar, funded by cheap borrowing in the Japanese currency.
Expectations that Japanese insurers and companies will bring money home to pay for claims and reconstruction also contributed to the yen's strength.
The euro jumped 3.5 percent to 114.60 yen, boosted in part by comments from Japanese Finance Minister Yoshihiko Noda that the European Central Bank may intervene in euro/yen.
Commodity currencies, such as the Australian dollar, performed even better and recovered a bit from their recent hammering.
The Aussie surged 4.2 percent to 80.75 yen and was up 1 percent against the dollar at $0.9916.
WILL INTERVENTION BE SUCCESSFUL?
Some analysts doubted any intervention would be effective, given past experiences by the Bank of Japan and the Swiss National Bank.
Intervention is no panacea. Everyone knows it. Japan has a much bigger credibility problem and that'll weaken the impact, said David Gilmore, a partner in FX Analytics in Essex, Connecticut.
I don't think we've seen the low in the dollar/yen. There's still a lot of carry trade exposure. The world is really levered up on this.
Other analysts said intervention may be more effective this time than it was in September when Japan spent $26 billion to weaken the yen but failed to ensure a lasting dollar rally.
The cost of hedging against a further yen rise fell, with implied volatility on one-month dollar/yen options trading at around 16 percent, down from near 21 percent on Thursday and showing the market calming a bit.
Views that ECB was likely to lift interest rates soon also helped underpinned the common currency, which last stood at $1.4070 and was poised to make a run at the November 2010 peak and chart resistance near $1.4280.
The dollar bounced off a record low of 0.8852 Swiss francs and was up 1 percent at 0.9065 francs. The franc had benefited from the recent market turmoil as it is usually seen a safe port in a storm.
The franc had earlier edged up after the U.N Security Council voted to authorize a no-fly zone over Libya, prompting further gains in oil prices.
(Additional reporting by Wanfeng Zhou in New York; Writing by Eric Burroughs; Editing by Lincoln Feast)
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