The dollar leapt more than two yen from a 15-year low on Wednesday after Japan intervened to sell yen for the first time in six years but analysts said the authorities could face a tough task in stemming yen gains.
The solo intervention helped propel the euro, Australian dollar and sterling sharply higher against the yen though traders doubted Japan had bought anything other than dollars. Kyodo news agency cited a senior finance minister official saying Japan had intervened during European hours and would do so again during New York hours if needed.
However, analysts said Japan's authorities would have to counter significant upward pressure on the yen, particularly if speculation of more U.S. quantitative easing continued. This could further narrow the gap between U.S. and Japanese yields — a key factor in recent dollar/yen weakness.
"Flows into the yen are very strong, and the Japanese authorities will have to offset those flows in order to prevent further yen appreciation," said Ian Stannard, currency strategist at BNP Paribas.
"A sustained upward move in dollar/yen is unlikely unless U.S. rate expectations start to rise."
At 1159 GMT, the dollar was up 2.9 percent at 85.48 yen, near a high of 85.72, according to Reuters data. The Bank of Japan acts for the Ministry of Finance in intervention, which traders said continued in the Asian and European sessions after an initial bout at around 83 yen per dollar shortly after the dollar hit a 15-year low of 82.87 yen.
During the European session, traders reported buying of dollars in the 84.95/85.00 area and at 85.25 on trading platform EBS, before strong offers above 85.50 capped the move.
The euro was 2.7 percent higher at 110.86 yen. Earlier it briefly entered its Ichimoku Cloud, an indicator of momentum and future areas of support and resistance, at 111.01.
"I think we're now going to see persistent official buying of dollar/yen in the near-term," said Adam Cole, head of currency strategy at RBC Capital Markets.
Some stop-losses were reported at 85.75 yen, but technical analysts said the focus remained on the downside while dollar/yen held below key resistance at 86.40, which is the bottom of the Ichimoku Cloud.
Sources familiar with the matter said the BOJ was ready to leave the intervention unsterilized rather than draining the funds that went into the currency market.
Japan's authorities aim to stop the yen's rise from hurting exporters and the economy. Prime Minister Naoto Kan said the intervention had achieved some effect but that foreign exchange moves were being watched with urgency.
Finance Minister Yoshihiko Noda said Japan acted alone.
Implied dollar/yen volatility was higher with the one-month trading around 12.50 percent up from 12.3 on Tuesday but well below year-to-date highs seen in May near 18.00.
Risk-reversals, the premium required to hold a put or a call in a currency, were showing less of a bias for yen calls. The one-month 25-delta stood around 0.70 for yen calls compared with 1.50 on Tuesday
The Bank of Japan started buying the dollar at around 10:30 a.m. (0130 GMT) on Wednesday.
Traders cited market estimates that the latest intervention amounted to around 1.5 trillion yen ($17.67 billion)
"Speculators have been long of yen so there is scope for further yen selling. But there's skepticism over whether the Japanese can change the trend as fundamentals haven't altered," said Beat Siegenthaler, FX strategist at UBS.
The yen gained fresh momentum on Tuesday after Japanese Prime Minister Naoto Kan won a leadership ballot against a rival seen as more willing to intervene to weaken the currency.
The euro was down 0.1 percent versus the dollar at $1.2977.
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