By Chikafumi Hodo
The yen advanced to a Tokyo high on Wednesday after Standard & Poor's slashed Japan's debt rating by one notch, a lesser cut than many players had expected, dealers said.
"The yen's rise after a downgrading is actually very unusual," said Hideaki Furumaya, head of the interbank desk at Mizuho Trust & Banking.
"But the market bought back the yen because S&P only downgraded by one notch instead of by as much as three notches, as some had speculated."
S&P said it had lowered Japan's long-term ratings to double A (AA), from double A-plus (AA+). It kept the rating under negative outlook.
S&P said the downgrade reflected Prime Minister Junichiro Koizumi's slow progress in carrying out pledged reforms, and warned that it could further downgrade if the government's debt dynamics worsened.
On Monday, S&P had warned of a possible two-notch rating cut.
The dollar initially edged up on the downgrade, but quickly fell back to near the day's low, dealers said.
As of 0320 GMT, it stood near a Tokyo low of 123.56/63 yen compared with Tuesday's late U.S. level of 123.90/4.00.
With the yen managing to rise after the downgrade, the dollar could slip further, traders said. The greenback's clear fall below 123.50 yen could temporarily intensify its downward swing toward 123.00 yen, they added.
WEAK U.S. DATA
The dollar has faced selling pressure following offshore losses that reflected weaker-than-expected U.S. consumer confidence data on Tuesday, dealers said.
The Conference Board's index of consumer confidence fell to 82.2 in November from 85.3 in October. Economists polled by had expected a rise to 87.9.
The dollar faced stiff resistance seen above 124 yen throughout morning trade as the market turned cautious about pushing the dollar up again after failing to sustain closely watched resistance above 124.50 yen.
Active bids triggered stop-loss buy orders and took the greenback to an almost four-month high of 124.58 yen in early European trade on Tuesday, but the upswing was short-lived.
"The dollar is in a consolidation phase after it failed to hold above 124.50 yen and break above 125 yen, despite a handful of yen-selling factors," a forex manager of a Japanese bank said.
"Although the yen's undertone remains weak, the dollar could edge toward 123 yen or slightly below that level in the near term."
The yen has been under repeated selling pressure since last week, and the latest sell-offs came on Tuesday after Japanese Finance Minister Masajuro Shiokawa acknowledged that some authorities in Tokyo wanted to drive it lower.
The yen has depreciated nearly four percent from this month's high of around 121 yen per dollar.
Shiokawa's comments were enough to hammer down the yen to near a four-month low on Tuesday. The Japanese currency had already been pounded on Monday after news that Fitch had cut Japan's debt rating.
The yen was also pressured as speculation swirled that the Bank of Japan could start purchasing foreign bonds as part of its monetary policy operations after London's Financial Times said last week the administration of U.S. President George W. Bush would not object if such a measure was used to weaken the yen.
EURO LITTLE CHANGED
The euro was little changed at $0.8830/35 . Against the yen, it was at 109.23/25 yen compared with Tuesday's late U.S. level of 109.41/51.
The reweighting of Morgan Stanley Capital International's global stock indexes, to be finalised on Friday, is set to favour shares in the United States and Britain over those in the euro zone and Japan.
This factor could put pressure on the euro and the yen, although some said the market had already largely factored in the reweighting.