LONDON, Oct 28 - The yen rose to a three-year high against the dollar and an eight-week peak against the euro on Tuesday as recovering stock markets and expectations of strong U.S. data lifted the cyclically-sensitive Japanese currency. Speculation the Federal Reserve would acknowledge a recent brightening in the U.S. economic outlook later in the session, but leave interest rates unchanged, gave added momentum to recovery trades. The euro and Swiss franc were the biggest losers. A larger than expected rise in Germany's Ifo business climate index did little to buoy the euro, which fell below 126.50 yen for the first time since early September and hit a one-week low below $1.1665 . "A positive Ifo is not necessarily positive for the euro, since it is a defensive currency," said Aziz McMahon, currency stratgist at ABN Amro in London. "The euro does well when global prospects are dim." A third day of gains in Tokyo stocks gave European bourses an early lift, while U.S. stock index futures pointed to a firm open on Wall Street.
The yen was also buoyed by speculation U.S. Treasury Secretary John Snow would criticise Japan's attempts to weaken the yen at a Senate hearing later this week. Such expectations were hardened after U.S. Commerce Secretary Don Evans delivered a no-nonsense message on China's growing trade imbalance on Tuesday, saying free trade had to be a "level playing field".
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U.S. durable goods orders for September, due at 1330 GMT, and consumer confidence for October, due at 1500 GMT, are both expected to reinforce the view that the economy is gathering momentum. The Fed is widely expected to keep interest rates unchanged at one percent when it announces its verdict at 1915 GMT, although economists are divided on how the central bank will manage interest rate expectations for the longer term. "The broader picture is a combination of reflation trades which are benefiting the yen and the view that the euro is settling lower having failed to break through on the topside," said Steven Pearson, chief currency strategist at HBOS.
The dollar fell below 108.20 yen for the first time in three years, while the euro suffered even heavier losses in percentage terms as the break of key technical levels triggered automatic sell orders. Dealers said the 108 level in dollar/yen would be a key test of Japan's pain threshold. Japanese authorities have made no secret of their concern that the yen's strength could choke off the nation's export-led economic recovery. "The threat of Japanese intervention is still there. They're just choosing their moment," said Derek Halpenny, currency economist at Bank of Tokyo Mitsubishi in London.//