By Mariko Hayashibara
TOKYO, Nov 9 - The yen shied away from one-month highs against the dollar on Friday, spooked partly by the possibility of Japanese intervention under 120 yen.
Japan's top financial diplomat, Haruhiko Kuroda, offered words of caution after the dollar hit a low of 119.77 yen offshore, but they barely caused a murmur since the market had largely expected the jawboning.
"We're watching the foreign exchange market carefully. Recent moves don't seem to reflect economic fundamentals. I think it's temporary," Kuroda said.
With September's 3.2 trillion yen ($26.7 billion) worth of dollar-buying intervention still fresh in traders' minds, the dollar had scrambled back over 120 yen by late New York trade.
The dollar was also helped by demand from Japanese importers and talk that speculators were eyeing large buybacks around 120.40/50 yen.
After hitting a high of 120.40 yen, the dollar steadied at 120.24/29 yen in late Tokyo afternoon.
Dealers and analysts puzzled over the exact level the government might choose for intervention, though most were predicting the trigger would be a dollar fall to somewhere between 118-119.50 yen.
"The last level at which intervention occurred was between 119 and 120 yen...so around 119 is the area that the market is cautious about," said Koji Fukaya, chief forex analyst at Bank of Tokyo-Mitsubishi.
Though the yen was well under this level on Friday, some analysts predicted a test of government resolve in the near future.
"Usually in this kind of environment the market will kind of drift down there and try to feel out where the Bank of Japan is," said Ron Leven, currency strategist at Lehman Brothers.
DOLLAR TO FALL FURTHER?
Many dealers, though, said the dollar was likely to stay in a well-worn range especially due to limited U.S. participation expected due to a holiday there on Monday.
But risks are greater for the dollar to test the downside, they said.
"The dollar is expected to show either extremely dull movements, or it could fall sharply," said a Japanese trust bank dealer.
This is because many dealers had built dollar long positions when the currency hit 119.77 yen, and they may be inclined to adjust those positions before the weekend, in late Tokyo afternoon or during London hours.
And because the market is expected to be thin in New York in pre-holiday trade, near-term support of 119.50 could be broken, triggering hefty stop-loss sales by U.S. funds, the dealer said.
"Japanese institutional investors are not on the downside supporting the dollar anymore," said another trust bank dealer.
He added that many were taking profits on the recent rally in U.S. Treasuries and converting their dollar gains into yen.
The Finance Ministry's capital flows data showed Japanese investors' net foreign bond purchases fell to 93 billion yen in the week that ended last Friday from more than one trillion yen in recent weeks.
The European Central Bank's aggressive move to cut interest rates by 50 basis points on Thursday did little to support the euro.
The yen soared to a six-week high of 106.81 yen on the single currency after the decision, with some dealers saying the cut had simply focused attention on the euro-zone's economic woes and strengthened the impression that the ECB is behind the curve.
The euro was hovering around $0.8892/97 , compared with $0.8926 in late New York. Against the yen, it was on the defensive at 106.91/01.
Dealers said the market is still euro long and that pressure on the currency is likely to remain. ($1=120.04 Yen)