/www.fxserver.com/ The euro/yen was higher late morning, with sellers of the Japanese currency turning to the euro after the recent sharp rise in the dollar/yen and with concerns over an expected US attack on Iraq, dealers said.
Sentiment towards the yen remains weak, despite short-covering in Japanese equities this morning, with investors confused and concerned by the details of Japanese reform policy and its implications for the economy, they added.
A speech to the nation by US President George Bush early this morning, outlining his case for a war against Iraq, added little to the debate.
The euro rose to a three-year high against the yen in late New York trade.
"This is a reflection of the yen's weakness. People prefer to hold long-euro positions, rather than the dollar, because of the risk of Iraq," said Minori Takeuchi, forex strategist at the Tokyo branch of JP Morgan Chase.
"Actually, it's confusion. We are looking for what will happen to Japanese policy. Foreigners complain they don't know what's going on but neither do the Japanese. The only thing that's sure is deflation will continue," Takeuchi said.
The recent slump in the Nikkei 225 index has raised fears Japan's banks may become under-capitalised due to their large shareholdings, with the 8,500 point level seen as a crucial mark.
However, this could be viewed positively in the medium-term as it may force the banks to accept injections of public funds from the government, which they are currently opposed to because of fears they will lose management control.
"It could be a good thing because it could force the capital-adequacy below 8% and pave the way for injections, but no one knows the scheme that will be put in place. There are many choices for the government," Takeuchi said.
Unprecedented policy action and the lack of clarity on how disruptive this will be for the economy are set to keep the yen under pressure, even though speculative players have already gone heavily short, she said.
"I think specs have already gone short (on) the yen and we saw some sell orders from Japanese customers yesterday. But this is different from six months ago. They have lost confidence in Japan," she said.
"They are also suffering from their US shareholdings and need to repatriate," she added.
Japanese investors are also likely to invest overseas, given the domestic woes, with their decision not to repatriate overseas funds ahead of the end of the fiscal half-year suggesting they are looking for greater offshore exposure.
"I think Japanese (investors) will buy foreign bonds, though not stocks, continuously. If they don't see much possibility of a higher yen, they could buy without hedging," Takeuchi said.
Japanese investors usually hedge their overseas-bond investments, which makes them largely currency neutral.
Technically, the dollar faces near-term resistance at 124.23 yen, but a definitive breach of this level will lead to further tests higher, with the long-term ceiling for the cross seen at 126 yen.
Tokyo 10.20 am New York 4.00 pm London 4.03 pm
Dollar
yen 124.21 down from 124.28 124.28
sfr 1.4868 down from 1.4892 1.4990
Euro
usd 0.9831 up from 0.9827 0.9824
stg 0.6273 down from 0.6277 0.6266
yen 122.11 up from 121.11 121.15
sfr 1.4616 down from 1.4633 1.4628
Sterling
usd 1.5671 up from 1.5656 1.5667
yen 194.64 up from 194.55 194.77
sfr 2.3299 down from 2.3313 2.3325
Australian dollar
usd 0.5495 down from 0.5503 0.5500
stg 0.3506 down from 0.3515 0.3512
yen 68.25 down from 68.38 68.35
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