Dollar near 7-mth low vs yen on Bernanke comments

Bernanke said the Fed stood ready to ease monetary policy further if the economy worsened, sending two-year U.S. Treasury yields to a record low, which reduced the allure of the dollar versus the yen.

The euro, which fell sharply after the comments sparked outflows from stocks and other risk assets, hit a two-week low against the yen. It edged up versus the dollar but stayed towards the bottom of its recent range before Europe’s bank stress test results on Friday.

“The yen is gaining after Bernanke on risk aversion and as an interest rate play in reaction to U.S. yields falling further and rate differentials moving in favour of the yen,” said Niels Christensen, currency strategist at Nordea in Copenhagen.

At 0730 GMT, the dollar was down 0.6 percent at 86.56 yen, extending losses after a 0.5 percent fall on Wednesday, on a mixture of Japanese exporter offers and hedging selling related to some currency-linked structured notes.

Traders said the dollar could fall fast if it breaks below a seven-month trough of 86.27 yen hit last week, with stop-loss dollar offers believed to be waiting below that level.

However, Yuki Sakasai, a forex strategist at Barclays Capital in Tokyo, said the dollar/yen rate was unlikely to fall much below the seven-month low for now.

“What Bernanke has said is essentially the same as the minutes (of the Fed’s June 22-23 meeting). So his comments alone are unlikely to push the dollar/yen below recent trading ranges,” Sakasai said.

The rise in the yen, which gained steeply on the crosses on Wednesday, has been hampered by caution that Japanese policy makers may try to talk it down as it nears a 14-year high around 85 yen per dollar hit last November.

Deputy Finance Minister Motohisa Ikeda said on Thursday Japan wants to avoid excessive rises in the yen, but market reaction was muted.

Yen gains came as the yield spread of two-year U.S bonds over Japanese government debt fell to a 15-month low.

STRESS TESTS

The euro fell 0.3 percent against the yen to 110.75 yen, having hit a two-week low around 110.03 yen, though traders said there were bids around the 110 yen level.

Against the dollar the euro rose 0.3 percent to $1.2773, though it stayed well below the previous day’s highs above $1.29. Traders said it had some support at its 14-day moving average around $1.2742 and around $1.2720, a July 9 high.

Sentiment towards the euro was helped by better-than- expected German purchasing managers’ surveys on manufacturing and services. Figures for the euro zone as a whole were due at 0758 GMT.

The euro has had a good run against the dollar in recent weeks, rising to a 10-week high above $1.30 on Tuesday as traders began to bet most of the 91 European banks being examined would pass the stress tests.

Major listed banks, which face constant investor scrutiny, are expected to pass, but the tests may show the worst problems lie with smaller players such as Spanish cajas and German landesbanks, which are mainly unlisted.

Euro/dollar 1-month risk reversals, a measure of currency sentiment, showed a slight bias for euro puts.

Traders said that partly reflected fears among traders that the euro may start falling after the bank stress test results.