The dollar rebounded from a four-month low against the yen Monday as the Bank of Japan (BOJ) supplied banks with record amounts of funds to stabilize an economy shaken by a devastating earthquake and tsunami.
The euro rose against the dollar after euro zone policymakers agreed to bolster a bailout fund for troubled countries and make its loans cheaper.
Traders said price fluctuations would remain more volatile than usual, though, as investors braced for yen repatriation and remained on alert for official intervention to weaken the currency should it test a record high against the dollar.
The dollar fell as low as 80.60 yen overnight, less than one yen from an all-time low of 79.75 yen hit in 1995.
But traders said investors expecting big repatriation flows from insurers were surprised by the BOJ, which doubled to 10 trillion yen an existing asset-buying scheme.
The dollar was last at 81.80 yen, about 0.1 percent lower, though one-month volatility rose to a four-month peak of 11.7 percent, compared with 8 percent before the quake.
With an anemic economy, a huge public debt burden and the BOJ's fresh monetary easing measures, "it is difficult to make an argument in favor of (yen) strength," said Simon Derrick, senior analyst at BNY Mellon in London.
Offers for dollar-yen were building around the 82.50 level, traders said, while stop-losses on short dollar positions lurked in the same area. Resistance was at 82.72, the top of the Ichimoku cloud, a closely watched Japanese indicator.
EURO GETS BOOST, JAPAN INTERVENTION EYED
The euro rose against the dollar after European policymakers, meeting in Brussels, surprised markets by agreeing to bolster a euro zone bailout fund and make its loans cheaper.
The euro rose as high has $1.3981 , its best showing in a week, and was last up 0.4 percent at $1.3955. Analysts said the summit success would focus attention on the prospect of a euro zone interest rate rise next month.
But analysts said the euro may struggle to retest the $1.40 mark as investors cut exposure to risk after Japan's quake and an emergency at two nuclear reactors.
Equities and currencies that do well when risk appetite is high, such as the high-yield Australian dollar, fell.
Goldman Sachs strategist Thomas Stolper said repatriation flows may only have a "relatively small positive impact" on the yen as many Japanese institutional holdings of overseas assets tend to be FX-hedged. Foreign purchases of Japanese stocks, which have recently accelerated, may also slow — which would be "a marginal yen negative."
"The clearest currency impact from the earthquake may therefore be an increase in volatility," he said in a note.
Then there's the chance that Japanese authorities would enter the market to weaken the yen if it rose past the record high of 79.75 yen per dollar.
"The yen might gain from capital repatriation flows after the quake, but the BOJ probably won't tolerate an excessive rise," said Roberto Mialich, currency strategist at Unicredit.
Japan intervened to weaken the yen against the dollar in late 2010, though it only slowed yen gains temporarily.
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