By Chisa Fujioka
TOKYO, March 4 - The yen pushed to a near two-week high on the dollar on Monday, cheered on by a 5.9 percent jump in Tokyo's main stock index.
The Nikkei share average .N225 beat Wall Street's pre-weekend gains to end the day at a six-month high.
The yen gained early as speculators gunned for large option positions rumoured at 133.00 yen, especially as the market seemed long of dollars after Friday's strong U.S. economic data and rally in U.S. stocks.
Adding momentum was the Nikkei, which marked a bullish break of its 200-day moving average for the first time in almost two years.
That forced more covering of short-selling in stocks, some of which were funded by borrowing yen. Traders expected the Nikkei to remain firm before the end of the business year on March 31, helped in part by tighter regulations on short-selling.
"The Nikkei should be supported temporarily so the risks are now for the dollar to test lower, perhaps to the low of 131.85 yen we saw in mid-February," said a dealer at a Japanese bank.
The yen also took heart in the weekend collapse of mid-sized construction firm Sato Kogyo . While the news fanned fears of multiple bankruptcies before the fiscal year-end, the yen drew comfort in the stock market taking the failure as a sign banks were speeding up their disposals of bad loans. Having recoiled from as high as 133.60, the dollar held at 132.72/77 yen by late afternoon, its lowest in nearly two weeks. The euro also struggled at a two-week low of 114.91/115.02 yen , having succumbed to a major options barrier at 115.00. On the dollar, the euro was sidelined at $0.8659/64 after slipping back from $0.8695 on Friday.
NIKKEI DAZZLES
Traders said they were impressed by the Nikkei's surge, but not without a pinch of salt as the gains could prove as fleeting as they were around pre-bookclosing last year.
"The big picture hasn't changed, with some positive signs of recovery for the U.S. economy while Japan's economic outlook remains as bleak as ever," the trader said. "The rise in the Nikkei should be temporary and I don't expect the dollar to break out of the ranges we've seen since the start of the year," he said.
The yen's gains could also be limited as fresh numbers on Monday showed there was simply more of it in the economy.
The Bank of Japan (BOJ) said Japan's monetary base rose 27.5 percent year on year in February, the largest rise since the oil crisis of 1974 and the sixth consecutive month of double-digit growth. Such massive growth would usually be seen as negative for the yen and even a herald of inflation, though it may take many months for lagging price data to reflect the growth. Consumer prices have been falling in Japan for three years. "The yen is not reacting in large part due to seasonal repatriation factors," said Shinichi Sato, manager at Tokyo-Mitsubishi Securities' Investment Strategy Division.
"But all other factors are pointing for the yen to weaken further during the April-June period," he said. The monetary base -- comprising money in circulation plus banks' deposits at the central bank -- has been rising fast since the BOJ embarked on its so-called quantitative easing policy a year ago to resuscitate the economy.