By Natsuko Waki
LONDON, Nov 9 - The yen eased from one-month highs against the dollar on Friday as jitters grew about the possibility of Japanese intervention to restrain it, while the sickly euro suffered across the board.
Yen intervention wariness intensified after comments by Japan's top financial diplomat Haruhiko Kuroda that recent yen moves were unfavourable, reminding the market Japan spent over $26 billion in September to deflect an export-damaging rise.
"The market got a gentle reminder Japan will not be happy to see the yen strengthen," John Kyriakopoulos, currency strategist at J.P. Morgan Chase said.
"We know the Bank of Japan was aggressive in September, so his comment was what people were anticipating once the dollar goes below 120 yen. It's business as usual for the Japanese authorities."
By 0910 GMT, the dollar nudged higher to 120.33 from offshore lows around 119.75. The euro remained frail but had trimmed losses against the yen to 107.25 , after falling to six-week lows of 106.76 on Thursday.
The euro extended losses against the dollar to six-week lows of $0.8889 although it pushed above $0.8900 in early European trade.
The single currency faltered on Thursday as a bigger-than-expected rate cut by the European Central Bank failed to boost it, with investor scepticism growing that the bank had been slow to react and its 50 basis point cut had been too little, too late.
"Euro/dollar is on the edge of a precipice," said Neal Kimberley, manager, European currencies, Bank of Tokyo-Mitsubishi.
"It could go to $0.8850 and euro/yen wll go down fast on a break of 107," he added.
Traders also attributed some of the euro's weakness in the wake of the unexpectedly large cut as down to suspicion the central bank had been pressured by euro zone finance ministers into making the move.
A Frankfurt-based trader said, "It won't solve the political problems of euroland. They were forced to do it."
The dollar also came under pressure after data showed Japan had a net capital inflow of 175 billion yen in the week of October 29 compared with net outflows of more than one trillion yen in the previous week.
YEN GAIN BY DEFAULT
Analysts agreed the yen's gains on Thursday were largely by default and were not justified by sound fundamentals.
The Japanese government said on Friday it expected the economy to shrink nearly one percent in the year to March, its worst contraction in at least 20 years, tossing out an unrealistic forecast of 1.7 percent growth.
With the economy entering its fourth recession in a decade, analysts agreed the last thing Japan wants is export-damaging yen strength.
And analysts suspect the BOJ would come in again if the dollar falls 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.
U.S. SENTIMENT TEST
Many dealers expected the dollar to stay in a well-worn range especially due to a U.S. holiday on Monday. But risks are greater for the dollar to test the downside, they said. The market was focused on U.S. October Producer Prices Index at 1330 GMT and University of Michigan November consumer sentiment at 1500 GMT.
Another drop in U.S. consumer confidence was likely to pressure U.S. equities and prompt investors to unwind their dollar positions ahead of the weekend.
The University of Michigan's closely watched consumer sentiment index is expected to show a decline in confidence in November after a surprise uptick last month. Economists polled by see the index dropping to 78.7 in November from 82.7 in October.
Tokyo traders also said some Japanese investors 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.