The yen rose against the dollar on Wednesday, lifted by seasonal flows from Japanese exporters buying at the end of their financial year, although gains could be temporary given the Bank of Japan determination to keep monetary policy ultra-loose.
The euro pared earlier losses against the Japanese yen to trade flat on the day with many expecting the yen's weaker tone to resume next week once the year-end flows are out of the way.
The dollar was last down 0.2 percent at 83.00 yen recovering from a session low of 82.61 in early European trade, with traders citing offers to sell dollars at 83.30 yen.
Over the two to three month horizon, we expect dollar/yen to rise to 85 yen as the broad direction is for a higher dollar, said Geoffrey Yu, currency strategist at UBS.
Analysts say with the government and the Bank of Japan stepping up its campaign to stimulate growth, more monetary policy easing could not be ruled out. They expect Japanese authorities to step up efforts to weaken the yen and give exports a boost.
Yen buying by Japanese exporters tends to peak at month-end, and there is additional focus on potential flows as the financial year for most Japanese companies closes on March 31.
Such seasonal factors helped spur yen-buying by Japanese exporters on Wednesday, despite reports that some had already hedged their foreign exchange exposure for the next few months. Dealers said Wednesday was the deadline for currency transactions to be carried out in time to settle for the fiscal year-end.
Barring the latest bounce, the yen has been under pressure since the Bank of Japan's surprise monetary easing in mid-February, when it expanded its asset-buying scheme by 10 trillion yen and set an inflation goal of 1 percent.
At the same time U.S. Treasury yields have risen, leading to wider spreads over their Japanese counterparts and enhancing the greenback's appeal. The dollar has risen nearly 8 percent against the yen so far this quarter and is on track for its best quarterly performance since early-2009.
John Hardy, a currency strategist at Saxo Bank said bearish yen positions against the dollar had been the main theme of the quarter and investors had taken it too far, heading into the Japanese fiscal year-end.
If you look at US/Japan rate spreads, they are not supportive of where dollar/yen is at the moment, he said.
Investors pay close attention to the spread between two-year U.S. and Japanese government bond yields. That has narrowed significantly from highs earlier in the month of around 28 basis points to 21 basis points on Wednesday..
U.S. DURABLE GOODS DATA EYED
Credit Agricole on Wednesday revised its dollar/yen and euro/yen forecasts higher. Although it expects a pullback in the dollar/yen in the near term given how quickly it has risen, it expects the greenback to rise to 85 yen by June and 87 yen by Sept 2012, up from previous forecasts of 81 and 83 yen respectively.
It expects the euro to end June 2012 at 109 yen, compared with its previous forecast of 104 yen and trade at 110 yen by Sept-end, up from an earlier forecast of 105 yen.
The euro pared early losses to trade flat at 110.80 yen, below a 4-1/2 month high of 111.43 yen hit last week on trading platform EBS.
The common currency rose 0.2 percent against the dollar to $1.3350, not far from a one-month high of $1.3386 hit on Tuesday.
The dollar was steady against a basket of currencies at 79.029 after slipping to a one-month low of 78.77 on Tuesday. It fell to a fresh one-month low against the Swiss franc on Wednesday of 0.90162 francs.
Dovish-sounding comments by Fed Chairman Ben Bernanke this week have knocked the dollar as expectations of another round of U.S. monetary stimulus rise.
Bernanke said on Tuesday it was too soon to declare victory in the U.S. economic recovery, warning against complacency in policy-making as the outlook brightens.
U.S. durable goods data due later on Wednesday are expected to show a 1.7 percent increase in February (ex-transport) after a 3.7 percent fall in January.
To the extent that Bernanke has raised the ante on U.S. growth indicators, durable goods orders due for release this afternoon will be the market's focus, said Societe Generale in a note.