Yen Rebounds Against Dollar, Euro As Bets Unwind

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The FINANCIAL — The yen strengthened in European trading Monday, recovering from an eight-month low against the dollar, while the euro stalled below $1.35 as traders looked ahead to Wednesday's expected stimulus from the European Central Bank with a more cautious frame of mind.


According to Borsa Italiana – London Stock Exchange Group, the dollar and euro had rallied sharply against the yen in late Friday trade and early Asian hours, hitting highs of Y81.66 and Y109.95, respectively.

However, both currency pairs then peaked, triggering an unwinding of bets against the Japanese currency.

"Recent yen weakness was justifiable due to the Bank of Japan's strong declaration of war on deflation, and the rally in energy prices due to Japan's total dependence on energy imports," said John Hardy, head of foreign exchange strategy at Saxo Bank.

"However, the yen's weakness seen getting ahead of itself from other angles such as interest rates and risk appetite caution ahead of Wednesday's Long Term Refinancing Operation," he said.

Some traders said the yen move also triggered selling of the euro against the dollar and sterling, with the euro slipping to a low below $1.34 after gaining around three cents the week before.

Trading conditions were quiet with little by way of economic data and no fresh Greek news until later Monday when the German parliament votes on Greece' latest bailout package.

Some analysts said Wednesday's three-year LTRO could yet boost the euro, depending on how much cheap long-term funding banks decide to takeup, with the current consensus centered on a figure of around EUR450 billion.

The ECB's generous liquidity measures, even so, don't detract from the fact the euro zone remains saddled with an onerous burden of high debt and low economic growth, they said.

"With the second three-year LTRO due later this week, there is no reason to doubt the merits of a tactical risk rally, yet we still question whether the market is making the mistake of ignoring the fact that liquidity is simply a temporary ersatz for much-needed structural adjustment," UBS strategist Geoffrey Yu said in a note.

Emerging-market currencies came under pressure as the Group of 20 nations' hesitancy at the weekend toward further bailouts for European countries weighed on sentiment. The Polish zloty, Czech koruna and Hungarian forint all came under pressure against the euro, while the Turkish lira and South African rand weakened against the dollar.

Looking ahead, the Bank of Israel is expected to keep interest rates on hold later Monday at 2.5%, with the focus turning to the post-meeting statement, the tone of which is expected to be particularly dovish.

At 1157 GMT, the euro was trading at $1.3396 against the dollar, compared with $1.3447 late Friday in New York, according to trading system EBS. The dollar was at Y80.60 against the yen, compared with Y81.20, while the euro was at Y108.07, compared with Y106.94. Meanwhile, the pound was trading at $1.5860 against the dollar, compared with $1.5875 late Friday in New York.

The ICE Dollar Index, which tracks the greenback against a trade-weighted basket of currencies, was at 78.595, compared with 78.398 late Friday in New York.



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