The yen dropped to a three-month low against the dollar on Monday after Japan intervened in the market to curb the currency's rise even as traders said more official action is needed for a sustained impact.
Japan's latest round of intervention, the latest in less than three months and its third this year, followed repeated warnings about the yen's strength and came just days before the Group of 20 leaders' summit in Cannes, France.
The intervention came after the dollar hit a fresh record low of 75.311 yen.
The dollar, however, was broadly stronger, with gains in the currency driven by renewed risk aversion as global stocks fell and peripheral euro zone bond markets come under pressure once again.
Traders were inclined to test Tokyo's resolve, pushing the dollar below 78 yen even though there had been talk of possible official bids around there. This brought it well below an earlier high of 79.553 yen on the EBS trading platform.
The Japanese intervention last night was not a tremendous surprise to markets...and indeed we had been looking for the Japanese to act in the currency space from last Sunday, said Brad Bechtel, managing director, at Faros Trading in Stamford, Connecticut.
We did expect they could target euro/yen in addition to dollar/yen on this round and in a way they have, by buying dollar/yen directly in the markets.
The dollar's peak of 79.553 yen was its highest since August 4, when Japan last intervened to weaken the Japanese currency. The greenback though was still shy of its 200-day moving average around 80.688 yen on EBS. It was last at 78.011, up nearly 3.00 percent.
Finance Minister Jun Azumi said Tokyo stepped into the market on its own at 10:25 a.m. local time (0125 GMT) and would keep intervening until it was satisfied with the results.
There were varied estimates on the scale of intervention, ranging from $150 billion to as low as $65 billion. Even the lower amount could be a record level for the Bank of Japan, acting on behalf of the Japanese finance ministry, as the previous one-day intervention record was $59.4 billion on August 4.
The scale of the intervention demonstrated the authorities' resolve, but more was expected given substantial long yen positions in the market. Data showed speculators doubled their net long position in the yen to 54,279 contracts in the week to October 25, the highest since the beginning of August.
The options market showed bets on the yen's gains against the dollar on a one-month horizon had not eased significantly, reflecting the market's belief that the impact of intervention would not last more than around 2-3 weeks.
Analysts said the authorities' task could be made difficult as Japanese exporters may sell into the dollar's rally to step up their currency hedging.
ITALIAN, SPANISH BONDS
Price action in dollar/yen overshadowed movements in euro/dollar, which fell 1 percent on the day to $1.40041, on renewed debt crisis fears. The euro was off a two-month high of $1.4248 hit late last week
Italian and Spanish bond yields surged on Monday, prompting the European Central Bank to buy the debt. Any relief from last week's European plan to contain the euro zone's fiscal problems faded with many details of the package still unclear.
Analysts said it could remain weak ahead of a European Central Bank policy meeting on Thursday, where an interest rate cut for December may be flagged.
However, the dollar could also come under renewed pressure if U.S. policymakers announce plans to explore further easing measures to support growth after a Federal Reserve two-day policy meeting starting Tuesday.
The dollar index rose 1.2 percent to 75.956.