LONDON (AFX) - The yen marched on while the euro continued to flounder in midday trade, largely on market positioning rather than fundamentals, triggering talk of possible intervention by the Bank of Japan or the European Central Bank, dealers said.
The rapid rise in the yen is attributed to a switch out of the euro, after yesterday's decline in U.S. equities spilled over across the Atlantic.
"It's traders' moves, it's not justified by fundamentals" said Julian Jessop, economist at Standard Chartered.
The BoJ believes a weak yen is favourable for the beleaguered Japanese economy, but the slump of the euro has pushed the Japanese unit upwards.
"There is a big concern about the weakness of the euro and its effect on the balance sheet of the Japanese financial market," said Jessop. He believes the BoJ is more likely to intervene than the ECB. However, if the ECB intervenes traders are likely to take the opportunity to sell the euro, Jessop added.
4CAST currency strategist Paul Bednarczyk highlighted the conflicting signals from officials regarding the likelihood of BoJ intervention.
Japanese Finance Minister Masajuro Shiokawa went on record to say he is not worried by "small movements like these", but Bednarczyk believes this is naive.
At the same time, the well-respected Japanese finance ministry official, Haruhiko Kuroda, has suggested that intervention remains a possibility while the yen's sharp decline is not justified on fundamentals.
His remarks boosted the single currency briefly.
But earlier comments from European Central Bank president Wim Duisenberg pushed the euro below 0.85 usd as traders interpreted his comments as ruling out ECB intervention.
Speaking at a conference organised by the Oestereichische Nationalbank, Duisenberg he said he believes current euro levels are not a problem for inflation.
"It must be the first case of verbal intervention by an official hitting the single currency," said Jessop.
Dealers added that intervention is all the more likely tomorrow if U.S. labour figures are strong.
They gave short shrift to comments by Christian Noyer, vice-president of the European Central Bank, who said earlier intervention to support the euro is an "option" which "exists". "It's a standard thing to say," said one.