* Yen comes under renewed pressure vs U.S. dollar, euro
* BoJ inflation goal, fear of debt downgrade weigh on yen
* Euro investors position before Thursday's ECB meeting
* Spain and Italy debt sales could sway sentiment
By Julie Haviv
NEW YORK, Jan 9 The yen fell against the U.S.
dollar on Wednesday, returning to a trend that recently drove
the currency to a 2-1/2-year low on expectations of more
forceful Bank of Japan policy and the possibility the central
bank will raise its inflation goal.
Yen price action should remain volatile as the BoJ Jan.
21-22 policy meeting nears, with the dollar's roughly 1.2
percent pullback in the previous two sessions viewed as an
opportunity to buy at lower levels.
The yen, which also tumbled against the euro, was weighed by
the prospect of the BoJ raising its inflation target at its next
meeting as well as fears of a downgrade on its government debt.
"Looking ahead to the BoJ later this month, investors are a
little hesitant to bid the yen up too much higher," said Omer
Esiner, chief market analyst at Commonwealth Foreign Exchange in
Washington. "The outlook for additional easing is keeping a lid
on the yen to the upside."
The dollar last traded at 87.78 yen, up 0.9 percent
on the day and well above a near one-week low of 86.81 hit
earlier in the session. On Friday, the dollar reached a
2-1/2-year high of 88.40.
Sources familiar with the BoJ's thinking said the central
bank was likely to adopt a 2 percent inflation target at the
meeting, double its current goal, and issue a statement with the
government promising bold monetary easing steps.
"A move toward a higher inflation target - Abe is seeking an
increase to 2 percent - would require even more aggressive
accommodation from the BoJ and would likely provoke additional
weakness in the yen," said Eric Theoret, currency strategist at
Scotiabank in Toronto.
The BoJ will also consider easing monetary policy again this
month, probably through an increase in its 101 trillion yen
($1.2 trillion) asset buying and lending program, the sources
Expectations that Japan's newly elected government led by
Prime Minister Shinzo Abe would push the BoJ to adopt more
forceful monetary stimulus measures have driven the yen sharply
lower in recent months. The dollar and euro eased against the
yen recently as investors locked in profits after steep gains.
At Friday's peak, the dollar had gained nearly 12 percent
against the yen since early November, and traders said the rally
was due for a pause.
"After a 10-12 percent rise, there is bound to be some
consolidation and a shakeout could possibly see dollar drop to
84 yen," said Howard Jones, partner at money manager RMG Wealth
Management in London.
"But any consolidation will be short-lived. From a macro
view, with a huge change of policy taking place in Japan and the
government determined to drive the yen lower, one must not
underestimate them. We are looking at the dollar hitting 100 yen
during the course of this year."
The Japanese economy is expected to recover a little in 2013
if Prime Minister Shinzo Abe's policies of massive fiscal
spending, aggressive monetary easing and a weaker yen produce
the momentum needed to lift Japan from stubborn deflation.
On Wednesday, Abe repeated his call to the BoJ to take
sufficient steps to achieve a 2 percent inflation target while
Finance Minister Taro Aso called for aggressive measures to beat
The euro last traded up 0.7 percent at 114.58 yen,
but was still below an 18-month high set on Jan. 2.
The euro, however, fell for a second straight session
against the dollar ahead of a European Central Bank meeting on
Thursday. While strategists suggest the ECB will keep its
interest rates on hold on Thursday, some investors and
economists believe rates will be cut later this year.
Comments from European Central Bank President Mario Draghi
after the central bank's interest rate announcement will have
the potential to sway currency sentiment.
In the options market, short-term risk reversals, a broad
gauge of currency market sentiment, show demand for protection
against a drop in the euro has risen over the past month.
Indeed, three-month euro/dollar risk reversals
remain biased toward puts, or the right to sell euros, trading
at 0.73 percent on Wednesday versus 0.65 percent a week earlier
and 0.5 percent at the beginning of last month.
Also on the radar screen this week are the first bond
auctions of the year from Spain and Italy on Thursday and
The risks of disappointment have increased and if this is
confirmed, headwinds for the euro could intensify, according to
Valentin Marinov, G10 strategist at CitiFX, a division of
Citigroup, in London.
"Decent auction results could help the euro consolidate in
the very near term," he said. "That said we suspect that this
could be only temporary."
That is because further sustained improvement in periphery
sentiment could come after a bailout request from Spain and more
clarity on the political outlook in Italy, he said.
The euro last traded 0.1 percent lower at $1.3064,
according to Reuters data.