The yen traded near a record high against the dollar on Thursday, hovering around levels that traders fear could test Japanese authorities' resolve to weaken the currency through direct market intervention.
The dollar hit a record low of 76.25 yen just as Asian trade opened after a break of the prior record of 79.75 triggered a cascade of automatic sell orders. It rebounded to 78.77 early in New York, though traders said there wasn't much momentum behind the move.
We're in unchartered territory at these levels. We lack technical indicators, which makes it hard to establish levels (at which to go long dollars), said C.J. Gavsie, director of FX sales at BMO Capital Markets in Toronto.
The market's jittery, liquidity is a concern because people are nervous, and we think some sort of intervention from Japanese authorities is likely in some shape or form, he said.
Group of Seven finance leaders and central banks will discuss steps to calm markets later on Thursday, though a G7 source said no firm policy action is expected.
But the source did call the meeting a demonstration of solidarity, and currency trades have taken that to mean other central banks may give Japan their blessing to sell yen unilaterally and drive the dollar higher.
The G7 discussion is likely to be about pre-approval of intervention by the Japanese and to some degree what would need to happen for joint intervention to be necessary, said Ray Farris, strategist at Credit Suisse. If dollar/yen lurches lower again, the Japanese will likely be first to intervene.
Japan spent $26 billion in September to weaken the yen, its first intervention since 2004. A strong currency undermines Japanese exports, drags down the Nikkei and worsens deflation. But the yen is stronger now than when Japan last intervened.
EURO, SWISSIE RISE
The euro hit a 2011 high of $1.4052 after solid demand at a Spanish bond auction and on the view that euro zone interest rates were likely to rise soon. It was last up 0.8 percent at $1.4004.
The dollar also fell to a record low of 0.8852 Swiss francs before bouncing back above 0.90 francs. While the Swiss central bank kept interest rates steady, the franc got a bid from investors who see it as a safe port in a storm.
The yen has been strengthening since last week's earthquake and radiation leaks from damaged nuclear reactors had traders bracing for Japanese investors to start bringing money home to pay for reconstruction.
Traders said the speed of the move -- the dollar shed more than three yen in some 20 minutes -- also forced margin calls for investors who had funded trades with cheaply-borrowed yen.
This entire move can be pinned down to speculative positioning rather than any repatriation flows and in the near term there is definitely a risk that this will continue, said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi.
Since it is speculative, intervention in this case should work and clear out some of the long yen positions, he said.
Japan's finance minister Yoshihiko Noda blamed speculation for the yen spike and said he was closely watching markets, a warning that the Bank of Japan may soon be given the signal to buy dollars.
The cost of hedging against a further yen rise jumped, with implied volatility on one-month dollar/yen trading close to 20 percent, though still below levels seen at the peak of the 2008 global financial crisis of around 30 percent.
The yean rose about six big figures against the Australian dollar to a six-month high before easing.
(Additional reporting by Neal Armstrong; Editing by )