As risk aversion remained at elevated levels, the US currency fell to lows near 109.0 against the yen on Monday before a tentative recovery as importer dollar demand increased and the yen reacted to over-bought technical conditions.

Japanese Prime Minister Fukuda voiced his opposition to excessive currency volatility which indicates that the Japanese government is taking the yen issue seriously, especially as it is unusual for the Prime Minister to comment on exchange rates. The Japanese authorities are likely to watch closely key support levels below 109.0 and will look to discourage further short-term yen gains. The yen retreated to beyond 110.0 on Tuesday even though Asian stock markets remained under pressure with choppy trading continuing.

Domestically, the GDP data was slightly stronger than expected with a 0.6% third-quarter increase as exports performed strongly, although housing investment weakened. The Bank of Japan again voted by a 8-1 margin to hold interest rates steady at 0.50% with Mizuno again voting for an increase. The central bank adjusted its monthly report slightly with a higher assessment of wholesale price inflation, but the yen surge this week will increase resistance to an interest rate increase.