Japan's finance minister kept up verbal intervention against a rising yen even as a weak dollar won a reprieve on Monday as U.S. lawmakers reached an agreement to raise the debt ceiling and avoid a sovereign default.
Yoshihiko Noda said he continued to watch markets closely even though he welcomed the news from Washington, Jiji news agency reported. The government's chief spokesman also expressed relief over the agreement and hope that it would help stabilize markets.
Republican and Democrat leaders agreed to reduce the deficit and prevent a default, U.S. President Barack Obama said on Sunday, and now both houses of Congress must approve the plan before the August 2 deadline.
Worries that the two parties could clash over fiscal policy again mean the United States is still vulnerable to a ratings downgrade, but the chance Japan will intervene to weaken the yen has receded as the dollar may have passed the worst phase of its recent decline, traders said.
There is still some chance of intervention, but the most Japan could do is jawbone the market or spend a small amount on solo intervention, said Tetsu Aikawa, deputy general manager of capital markets at Shinsei Bank.
The dollar could bottom out against the yen for the time being, because Treasury yields are likely to rise and spreads could widen.
Traders have virtually ruled out a repeat of the co-ordinated yen-selling intervention that the Group of Seven carried out in the aftermath of the devastating earthquake in March.
Against the yen, the dollar climbed to as high as 78.05 yen on Monday, up 1.8 percent from Friday's four-month low of 76.70 yen. It later gave up some of the gains to trade around 77.65 yen, but was still near levels that make policymakers worry about maintaining export competitiveness.
I feel it's necessary to continue to closely monitor market moves, Noda told reporters before Obama's announcement.
Japanese officials had become increasingly alarmed that U.S. lawmakers would miss the deadline due to wrangling over spending and tax cuts, sources told Reuters on Sunday.
They also voiced concern that anything short of a convincing and lasting solution to the U.S. debt debacle could still lead to market turmoil.
Japanese monetary authorities have indicated that they are prepared to step into the currency market to stem yen rises if they see the moves as driven by speculators and damaging enough to the economy.
(Editing by Tomasz Janowski)