The yen fell sharply to its lowest in almost two weeks against the dollar on Tuesday following a slew of warnings by Japan that it was prepared to step in to weaken the currency.
The dollar rose 0.9 percent to a 12-day high of 109.26 yen JPY=, after surging more than 1 percent on Monday. The U.S. currency tumbled to an 18-month low of 105.55 yen last week after the Bank of Japan stood pat on monetary policy.
Finance Minister Taro Aso said on Monday that Tokyo was ready to intervene to weaken the currency if moves were volatile enough to hurt the country's trade and economy. He reiterated that message on Tuesday.
A key economic adviser to Prime Minister Shinzo Abe, Koichi Hamada, said on Tuesday that Japan would intervene in foreign exchange markets if the yen rose between 90-95 per dollar, even if it upset the United States.
Traders said speculators were cutting favorable bets on the yen, having piled into the currency in the past few weeks. [IMM/FX]
"Considering that speculative long positioning remains relatively sizeable, such comments should increase uncertainty among all those who remain long," said Manuel Oliveri, currency strategist at Credit Agricole. "We do not exclude further position squaring-related downside risks."
Still, many believe the bar for intervention is high and unless the yen strengthens rapidly toward the 100 mark against the dollar, authorities are likely to stay on the sidelines.
Traders said Japan will also be wary of intervention before it hosts a G7 meeting later this month. Attendees at previous G7 meetings have frowned upon interventions, and Tokyo is sensitive to criticism that it is trying to engineer a weaker yen.
A recent U.S. Treasury report termed countries with substantial trade surpluses such as Japan which try to weaken their currencies through "persistent one-sided" intervention as manipulators.
"The steady stream of verbal intervention seems to have spooked speculators," said Peter Rosenstreich, head of market strategy, Swissquote Bank, adding higher stock markets were also dampening demand for the safe-haven yen. He said the dollar could run into some resistance at 109.30/45 yen.
The euro rose 0.8 percent to a near two-week high of 124.39 yen EURJPY=R, pulling further away from a three-year trough of 121.48 plumbed late last week.
The common currency was flat against the dollar at $1.1385 EUR=. The dollar index .DXY was at 94.20, having hit its highest in nearly two weeks in the Asian trading session and extending its rise from a 15-month trough struck on May 3.
(Additional reporting by Shinichi Saoshiro; editing by Ralph Boulton)
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