NEWS / Foreign Exchange

FOREX-Yen jumps after Japan outlook upgraded

By Chikako Mogi

TOKYO, May 23 - The yen jumped against the dollar and the euro on Tuesday after ratings agency Standard & Poor's revised its rating outlook for Japan to positive from stable.

The news hit the market as the dollar struggled to extend gains after hitting a two-week high against the yen on Monday and investors grew nervous about how long a sell-off in emerging markets and stocks would continue.

"The yen's jump on rating news underscores how volatile the market is and how speculators are leading the trading, taking advantage of a lack of direction and a lack of major news," said Hideki Hayashi, global strategist at Shinko Securities.

Immediately after the S&P announcement the yen darted up 0.4 percent to the day's high around 111.00 per dollar and rose 0.3 percent to around 142.90 per euro.

But yen buying lost some steam as short-term dealers took profits on bets against the dollar while Japanese mutual funds bought the U.S. currency at its lows, traders said.

By 0555 GMT, the Japanese currency traded around 111.15 yen <JPY=>, up from near 111.55 yen in late New York trade. The yen hit a two-week low of 112.95 per dollar on Monday.

The euro was at 142.95 yen <EURJPY=>, down from around 143.55 yen late on Monday.

While the market's main focus remained on whether the Federal Reserve will raise interest rates again in June, heightened volatility across assets has caught the attention of investors in the past two days, propping up the dollar.

Some traders say that a large-scale shifting of funds out of high-risk assets such as shares in emerging economies and commodities could be positive for the dollar, given that U.S. Treasuries are often bought as safe-haven assets.

But other traders said it is difficult to tell where money is escaping to.

"We don't know who had bought Indian shares or Latin American shares the most. I think many people just don't want to hold big positions right now," said a trader at a European bank.

Indian share prices tumbled more than 10 percent at one point on Monday, while stocks in some Latin American countries posted their biggest losses in years.

The euro was little changed at $1.2860 <EUR=> after rebounding sharply from a low of $1.2692 on Monday.

Reflecting the asset volatility, gold plunged almost $100 from a 26-year high before rebounding on Monday. On Tuesday in Asia, gold rose as much as 1 percent to above $663 <XAU=>, up from a one-month low of $636.20 marked the previous day.

Gold and the dollar tend to move inversely to each other.

UNWINDING POSITIONS

Some analysts said that currency trading had become choppy and unpredictable because it was largely dominated by position unwinding, rather than by fresh investments.

"Given that U.S. Treasuries did not rise much yesterday, I don't think there's full-fledged risk aversion among investors," said Kikuko Takeda, currency analyst at the Bank of Tokyo-Mitsubishi UFJ.

"When all the position unwinding has run its course, markets will reclaim stability and shift focus back to interest rate gaps and global imbalances," she added.

The dollar rose 15 percent against the yen and the euro last year thanks to a succession of U.S. interest rate hikes.

But worries about a narrowing yield advantage along with a growing conviction that U.S. officials want a weaker dollar to help reduce the country's gaping deficits have conspired to drive the dollar to one-year lows against the euro and pound this year.

Traders are looking to upcoming comments from Fed chief Ben Bernanke, who is due to testify before the Senate Banking Committee later in the day, although the subject -- financial literacy -- is not directly related to the economic outlook.

Signs of building U.S. inflationary pressures last week have revived expectations for the Fed to raise rates for a 17th straight time in June, which would take the fed funds rate to 5.25 percent.

(Additional reporting by Eric Burroughs, Hideyuki Sano)