The yen edged off a record high against the dollar on Thursday ahead of a conference call by Group of Seven finance ministers on fears officials may soon intervene to rein in the currency's rapid rise.
The dollar hit a record low of 76.25 yen on trading platform EBS. Asian trading began after a break of the previous record low of 79.75 triggered a cascade of automatic sell orders. The dollar later bounced back to hover around 79 yen.
G7 finance officials will hold talks via conference call from around 6 p.m. (10:00 p.m. GMT), and traders said the market may trim lingering yen longs shortly before that, which could push the dollar toward its session peak around 79.75 yen.
A Dow Jones news report quoted an unnamed source as saying Japan's ministry was ready for battle on the yen. A G7 source said G7 nations are not expected to agree firm policy action but will offer solidarity to Japan and review its plight.
We believe that unilateral intervention with the approval of the G7 is likely following tonight's meeting and that joint intervention or a one off coordinated response is possible, said Sara Yates, currency strategist at Barclays Capital in London.
However, we believe the main motivation for this will be to 'lean against the wind' and prevent a rapid and potentially destabilizing appreciation of the yen, rather than to depress the yen over time, Yates said.
The yen has seen steady buying since last week's earthquake, as Japanese and international investors closed long positions in higher-yielding, riskier assets such as the Australian dollar, funded by cheap borrowing in the Japanese currency.
Expectations that Japanese insurers and companies will start bringing money home to pay for claims and reconstruction may also have helped boost the yen.
Japan's finance minister, Yoshihiko Noda, blamed speculation for the yen spike and said he was closely watching markets, a warning that authorities may soon buy dollars.
The dollar rebound was driven partly by Japanese importers and some retail margin traders. The latter were cited as a main factor behind the earlier plunge, with the speed of the decline -- the dollar shed more than three yen in about 20 minutes -- forcing them to dump trades financed with borrowed yen.
CHANCE OF SUCCESS HARD TO PREDICT
G20 deputies held a conference call to discuss the crisis in Japan on Thursday but the talks did not broach currency exchange rates.
Some analysts doubted any intervention would be effective, given past experiences by the Bank of Japan and the Swiss National Bank.
Intervention is no panacea. Everyone knows it. Japan has a much bigger credibility problem and that'll weaken the impact, said David Gilmore, a partner in FX Analytics in Essex, Connecticut.
I don't think we've seen the low in the dollar/yen. There's still a lot of carry trade exposure. The world is really levered up on this, he said.
Other analysts said intervention may be more effective this time than it was in September when Japan spent $26 billion to weaken the yen but failed to ensure a lasting dollar rally.
This entire move can be pinned down to speculative positioning rather than any repatriation flows, 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.
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.
Absent intervention, there's little to stand in the way of further yen gains, said Alan Ruskin, Deutsche Bank's global head of G10 currency strategy.
The Japanese probably did themselves a bad turn when it comes to credibility by not stepping in sooner, Ruskin said.
People may be more inclined to fight intervention now than they would have been yesterday, and it looks like active types are looking to sell upticks, he added.
The euro hit a 2011 high of $1.40534 on EBS 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 0.9 percent at $1.4025.
The dollar 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. (Additional reporting by Steven C. Johnson and Julie Haviv; Editing by Andrew Hay)