* Dollar expected to fall back below 80 yen in medium
* Euro steady vs dollar, well above two-month low hit on
* Aussie pressured after IMF cites room for further easing
By Lisa Twaronite
TOKYO, Nov 16 The yen steadied on Friday after
plunging to a six-and-a-half month low against the dollar in the
previous session on expectations a new Japanese government could
push the Bank of Japan to adopt interest rates of zero or below.
Strategists remained divided over whether the Japanese
currency has entered a new weaker phase against its major
counterparts, or whether its dramatic drop this week will prove
to be an aberration.
The dollar has rallied more than two percent against the yen
over the past two sessions after Japanese Prime Minister
Yoshihiko Noda said he was ready to dissolve parliament's lower
house on Friday for an election on Dec. 16.
"The substantial weakening of the yen in the past 48 hours
has a lot of people rethinking their game plan," Andrew
Wilkinson, chief economic strategist at Miller Tabak & Co in New
Shinzo Abe, leader of the main opposition Liberal Democratic
Party and likely to be Japan's next leader, called on Thursday
for the country's central bank to adopt interest rates of zero
or below zero to spur lending.
BOJ Governor Masaaki Shirakawa has opposed cutting rates to
zero, but his five-year term ends in April and the new
government can choose his replacement.
"We know that parliament's being dissolved, and the new
Liberal Democratic government, when formed, is likely to be more
proactive in trying to manipulate the Bank of Japan into further
easing, including the potential for moving short-term interest
rates negative," said Wilkinson.
"It seems like perhaps the makings of a shift in the value
of the Japanese yen," he said.
The dollar last traded at 81.05 yen, down about 0.1
percent from late U.S. trading, with traders citing a large
options barrier at 81.50 yen and stop-loss orders placed above
The dollar rose to as high as 81.46 yen on Thursday on
trading platform EBS, its highest level since late April, and
just shy of the 61.8 percent Fibonacci retracement from its
March high of 84.18 yen to its September trough of 77.13 yen,
which is at 81.49 yen.
On the downside, stops are seen at the former resistance
area at 80.60 yen to 80.70, with 80.55 yen cited as 38.2 percent
retracement of the pair's most recent rise from 79.07 yen on
Nov. 9 to its Thursday high.
"The pace of the yen's fall this week has been rapid, and a
correction is possible, but I've believed that weakness is ahead
for the yen ever since September when the BOJ's (Takehiro) Sato
said in an interview that it should take more steps," Kimihiko
Tomita, head of foreign exchange for State Street Global Markets
Sato, a former Morgan Stanley economist appointed to the
BOJ's policy board this year, called for consideration of new
measures to lift Japan's economy.
But while further yen weakness in coming days is possible,
there has been no significant change in yen flows and yield
differentials between the U.S. and Japan, according to Tohru
Sasaki, FX Strategist at JPMorgan.
Therefore, the dollar's current rally does not change the
medium-term view that the pair will eventually fall back to
below 80 yen again, Sasaki said in a note to clients on Friday.
"If current yen weakness is just because of speculation
caused by the comments from PM Noda and possible next PM Abe, it
is unlikely to be sustainable," he said.
The BOJ is set to hold steady at a policy meeting next week.
It might also defy market expectations of action next month and
hold off on any further monetary stimulus until early next year
to size up the policies of a new government, sources say.
The dollar could benefit from safe-haven flows in coming
weeks, market participants say, on fears about the looming U.S.
"fiscal cliff" crisis. President Barack Obama and Congressional
leaders will begin budget talks on Friday to attempt to reach a
deal on avoiding some of the $600 billion in spending cuts and
tax hikes due to start taking effect in January.
The yen also edged higher against the euro, with the
European unit buying 103.49 yen, down 0.2 percent and
moving away from its two-week EBS high of 104.00 yen hit on
Thursday. Resistance was seen at the euro's Oct. 23 high at
104.59 yen, with the base of the weekly Ichimoku cloud at 104.77
yen viewed as the next resistance above that.
Against the dollar, the euro inched down about 0.1 percent
to 1.2770, but still well above Tuesday's two-month low
of $1.2661. Its Thursday high of $1.2802 was just below
resistance at its 200-day moving average, now at $1.2810. Above
that is 38.2 percent retracement of its Oct. 17 high of $1.3140,
which is at $1.2844.
The Australian dollar was slightly lower at $1.0323
, after touching a three-week low of $1.0303 on
The International Monetary Fund on Thursday praised
Australia's economic policies, commending the central bank's
loose monetary stance and saying there was room to ease further