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Euro undermined by debt worries, yen gains

The yen pushed higher, with market players citing yen buying by Japanese investors and exporters in yen crosses and the dollar.

“Sovereign debt jitters refuse to die down,” said Nick Mellor, currency strategist, at Bank of New York Mellon. “Spreads for Greek, Italian and Portuguese debt remain elevated, despite the good responses to Irish and Spanish debt auctions this week. So we should see that impacting the euro.”

By 0800 GMT, the euro was down 0.2 percent at $1.2858, holding above support at around $1.2845 which was the 50 percent retracement of the single currency’s fall from its March 17 high of $1.3817 to its four-year low of $1.1876 struck on June 7. Next support is seen near its 100-day moving average of $1.2781 and then at this week’s low of $1.2730.

The euro fell 0.3 percent to 109.91 yen, giving back half of the previous day’s 0.6 percent gain. It had hit a near seven-week low of 109.07 yen on trading platform EBS earlier this week.

The 10-year Greek/German government bond yield spread remained high at 854 basis points. The equivalent spread on Portuguese bonds was flat at 285 basis points ahead of debt auctions later in the day. Germany is also scheduled to sell bonds on Wednesday. The dollar shed 0.1 percent against the yen to 85.45 yen, staying above its 15-year low of 84.72 yen hit on EBS last week.

The dollar’s moves against the yen have recently had a high correlation with U.S.-Japanese government bond yield spreads, which have narrowed as U.S. Treasury yields fell sharply in the past few months.

Traders said Japanese exporters were placing dollar offers from around 86.50 yen to 89.00 yen, having lowered their target levels for selling the dollar from around 90 yen previously.

MARGIN TRADERS

Data from the Tokyo Financial Exchange showed Japanese margin traders’ net long positions in dollar/yen stood at 146,095 contracts — about $1.46 billion in value — on Tuesday, down form a recent peak of 182,966 contracts on Aug. 6 but still a very high level historically.

Margin traders with dollar bets are likely to take profits when the greenback rises, limiting gains. Investors are also watching whether the Bank of Japan or the government will take new steps to rein in the yen’s export-sapping rise ahead of a meeting between Prime Minister Naoto Kan and Bank of Japan Governor Masaaki Shirakawa expected next Monday.

Japanese authorities seem unlikely to conduct yen-selling intervention, however, unless the yen’s rise accelerates sharply, market players say.

Meanwhile, the Canadian dollar was flat against the greenback at C$1.0325 having surged on Tuesday after BHP Billiton launched an unsolicited $38.6 billion bid for Canada’s Potash Corp..

“As is often the case with international M&A deals the ‘buy the rumour, sell the fact’ reaction often dominates,” Ulrich Leuchtmann, analyst at Commerzbank said in a note.

“Usually it is unknown what share of the deal is actually settled in cash and which currency will be used. The subject will initially provide subliminal support for the Canadian dollar.”