LONDON, Aug 22 - The euro steadied on Friday after suffering its biggest one-day fall against the yen since June 2001 in the previous session and dealers waited to see if the euro's rout this week had run its course. The euro has taken a heavy beating in recent days as renewed confidence in a global recovery has sent investors out of safe-haven euro zone bonds, a popular defensive trade at the start of the year, and into equity markets. "The euro is suffering from both negative sentiment and negative capital flows. It's the mirror image of the story that prevailed in the spring," said Shahab Jalinoos, senior foreign exchange strategist at ABN Amro.
A raft of upbeat U.S. economic indicators on Thursday only accelerated the euro's collapse, knocking it to four-month lows below $1.09 and 128.30 yen and setting it on track for its biggest weekly fall against both currencies in over two years. The single currency, which has now fallen almost 10 percent from record peaks against the dollar and the yen scaled in May, was holding just above these four-month lows early in the European session. "Japanese investors who bought heavily into the euro zone bond market on an unhedged basis when the global environment looked very different are now pulling their money out and putting it into Japanese stocks," said Jalinoos.
RECOVERY TRADES
The euro's sharp fall this week has coincided with steep gains in global stock markets as a raft of upbeat economic data -- particularly from the United States and Japan -- has encouraged investors to shift funds into high growth markets. "It has been a very interesting week, characterised by an improving economic environment," said Derek Halpenny, currency economist at Bank of Tokyo-Mitsubishi. "The speed of the euro's fall has taken many by surprise and people sitting on stale euro long positions have been forced to bail out." With little in the way of economic data on Friday, dealers said the euro would take its cues from moves in the bond and equity markets. Data released earlier on Friday showed Japanese industry activity rose more than expected in June, supporting recent evidence the economy was moving towards recovery after a decade of torpor. The all-industries activity index, a barometer of conditions in sectors such as construction and manufacturing, rose 0.9 percent during June. Economists had widely expected a flat reading.
U.S. data on Thursday, including the Philadelphia Federal Reserve manufacturing survey, jobless claims and leading indicators, also painted a brighter economic picture.
YEN STRENGTH
Japan's cyclically-sensitive economy is seen by many as having the most to gain from a global upturn and flows into Japanese equities have fuelled the yen's outperformance against both the euro and the dollar. The dollar was trading at 117.85 yen at 0800 GMT, having fallen to its lowest level in over a month on Thursday. However, dealers were reluctant to extend the yen's gains, particularly against the dollar, for fear of yen-selling intervention from Japanese authorities. Japan's top financial diplomat, Zembei Mizoguchi, told reporters he did not see conditions in place for the yen to strengthen further, adding the Finance Ministry would take action as needed. Japan has sold a record nine trillion yen already this year to block the yen's rise, which it fears could hurt exports. Kouki Muroi, deputy manager of the forex trading group at Aozora Bank, said 117.50 yen was crucial for dollar/yen as the Japanese authorities probably wanted to protect that level. "Once it breaks 117.50, the dollar's fall could be quite steep," he said. //