The yen rose towards a 15-year high against the dollar on Tuesday as traders looked to test Japanese authorities' resolve on intervention after the Bank of Japan's easing steps the previous day failed to scare investors from betting on it rising further.
With mounting U.S. economic worries seen keeping investors away from risk assets such as high-yielding currencies, the market is likely to push up the low-yielding yen, which could eventually prompt Japan to sell its currency in the markets for the first time in more than six years.
"Will they intervene today? No. But markets will become more nervous if the yen approaches 80 yen (to the dollar)," said Etsuko Yamashita, chief economist at Sumitomo Mitsui Banking Corp.
"If a raft of U.S. economic data due this week pushes the yen higher, Japan may indeed intervene," she said. On top of closely watched jobs numbers on Friday, there is housing price data on Tuesday and manufacturing data on Wednesday.
Traders said any Japanese intervention is likely to be a unilateral action, given the perception that neither the United States nor Europe would be keen to help boost the value of their own currencies in light of weakness in their economies.
Japanese authorities are expected to buy the dollar against the yen to curb the yen's strength if the dollar slides 3-4 yen in one day, traders said.
Japanese Finance Minister Yoshihiko Noda repeated on Tuesday that the government would take decisive action on currencies — usually seen as code for intervention — when necessary.
But reaction in the market was limited.
The dollar slid 0.4% to 84.27 yen, edging near the 15-year low of 83.58 hit last week. It fell 0.7% on Monday as investors took profits after the Bank of Japan announced its decision to expand a cheap funding programme.
CORRELATION WITH U.S. TREASURIES
The greenback fell nearly 2.6% against the Japanese currency this month after sliding 2.2% in July and around 3% each in June and May.
As the dollar/yen rate has had a strong correlation in recent months with the yield gap between the United States and Japan, a sharp fall in Treasury yields on Monday also weighed on the dollar.
Treasury prices jumped on Monday, with 30-year bond prices rising two full points, recovering from a sharp sell-off on Friday.
In addition, the yen could face potential buyback pressure in cross-yen trades such as euro/yen and Aussie/yen, which have attracted some interest because of their larger yield differentials.
"Many stop-losses for Japanese margin traders are expected to be triggered when the Australian dollar falls below 75 yen," said a trader at a Japanese brokerage.
The Australian dollar fell 0.3% to 75.24 yen, dented by a 3% fall in Tokyo's Nikkei stock average that fuelled risk aversion among Japanese investors.
Japanese retail margin traders boosted their combined net long position in dollar/yen and six cross/yen pairs by 53,138 contracts, or 13%, to 461,456 contracts on Monday, according to Tokyo Financial Exchange data. This boosted their combined net long positions in seven major currencies against the yen near a record high of 508,101 lots marked on August 24.
If the yen keeps strengthening, margin traders will sooner or later be forced to dump their heavy bets against the Japanese currency, possibly adding momentum to its rise.
In another sign of investor risk aversion, the euro slumped to a record low against the safe-haven Swiss franc on heavy selling by emerging market players.
The euro fell as low as 1.2934 franc, down 0.4% on the day.
The euro fell 0.5% against the yen to 106.65 yen, crawling towards a nine-year low of 105.44 yen hit last week.
Against the dollar, the euro was little changed on the day at $1.2659.
It is expected to find some support around $1.2605, a 50 percent retracement of the euro's rally from June to early August, and at a low of $1.2588 hit a week ago, although a break below these levels could set off a fresh downward trend.
Some traders said recent rises in spreads of sovereign CDS in some euro zone countries, such as Ireland and Italy, were rekindling fears about the euro zone's debt problems, which pushed the single currency to a four-year low earlier this year.
The Australian dollar climbed 0.3% to $0.8941, after a stronger-than-expected reading in Australian retail sales.
