By Wayne Cole
TOKYO, March 6 - The yen soaked up a flood of negative news on Wednesday as talk of foreign flows into Japanese equities helped it stay within striking distance of seven-week highs on the dollar. A relatively narrow range of 131.88 to 132.50 for the Tokyo session belied an often hectic and confusing session with currencies veering back and for in heavy two-way trade. In contrast the euro/dollar cross was a haven of calm, though a Financial Times report speculating on a possible downgrade of Germany's credit rating did contribute to a dip to $0.8706 from $0.8724 in New York on Tuesday. "The yen's resilience suggests a lot of bad news is already priced in," said Ken Landon, senior currency strategist at Deutsche Bank. "The choppy trade points to a lot of speculative flows and not a lot of conviction on behalf of real money managers." It may have been that uncertainty that kept the dollar pinned at 132.12 yen , in line with New York's 132.14 but still uncomfortably close to the lows of 131.57 hit on Tuesday. The euro was equally indecisive against the yen, hovering at 114.98 yen having rallied from 114.27 offshore to as high as 115.33 this morning. THE GOOD Helping the yen was news Merrill Lynch had cut its recommended exposure to U.S. and U.K. equities while upgrading Japan and global emerging markets. The bank argued that with the global recovery gathering momentum, it was time to take a positive stance on the more cyclical equity markets around the world. Merrill's move follows Monday's decision by two other U.S. investment banks to increase their weightings for euro zone stocks at the expense of U.S. equities. That in turn has been cited as one reason the recent rapid rise in Wall Street has not translated into gains for the dollar. Indeed, traders reported talk that a U.S. securities house had been a heavy seller of dollars for yen Wednesday, perhaps to increase weighings in Tokyo shares, while a hedge fund had been spotted shifting from U.S. to European equities on Tuesday. THE BAD Still, there was no shortage of negative news for yen bears to chew on. Moody's Investors Service again warned its review of Japan's credit rating might result in an aggressive two-notch downgrade and that, if the situation continued to deteriorate like it has been, the pace of downgrades might even accelerate. Economic data out showed an unexpectedly severe fall in capital spending by Japan's corporations which sent analysts scurrying to slash their forecasts for fourth quarter GDP. The GDP figures are due Friday and analysts already expected a fall of around 0.2 percent, the third straight quarter of contraction. Bank of Japan board member Teizo Taya said he would not argue with the yen's decline as long as it was the natural result of economic weakness. However, he did reject calls for the BOJ to deliberately push down the yen by buying foreign bonds. If all this were not enough, traders were hearing whispers that Japan's state pension fund, which manages a massive nine trillion yen in funds, might increase its weighting of foreign bonds. THE UGLY The yen's stoicism in the face of all this gloom led some traders to suspect the deadening hand of option positions. One rumour was that an Asian bank had taken a double no touch option with strikes at 131.50 and 135.75 which is essentially a wager that the currency will touch neither of those levels until the position matures late this month. Others reported talk of a big binary option with strikes at 131.75 and 134.50 while some heard an option trigger at 132.70 was due to expire Friday worth anything from $1.0-$2.0 billion. "You can't take a call without hearing some story about a big option being protected or some exotic bet on dollar/yen staying in a range," said a U.S. bank dealer. "These positions have to be managed by meddling in the spot market and you never know if this buy order is for that option or this seller is trying to break that one. "Makes for erratic trading," he complained.