The dollar failed to hold above the 107.30 resistance level against the yen on Friday and was below 107 in US trading. The yen retained a firm tone in Asian trading on Monday and was holding around 106.65 against the dollar before gains to beyond the 106.0 level. The Japanese currency also gained increased support against the Euro with a move to 5-month highs beyond 155.0.

The attitude of Japanese investors will continue to have an important yen impact. Underlying caution over the global economy should provide firm support as yen moves remain correlated with trends in international stock markets.

The Nikkei index weakened sharply on Monday with a drop of over 3% and this will increase the potential for capital repatriation flows back to Japan which will continue to underpin the yen. Elevated risk aversion should continue to support the currency in the short term as fear maintains the dominant market factor. European equities fell sharply due in part to margin calls and this put strong upward pressure on the Japanese currency as carry trades were also liquidated.