The yen held firm against major currencies on Tuesday as dealers continued to bet upcoming Japanese data would confirm a rosier economic outlook, while a disappointing euro zone sentiment index dragged on the euro. Yen bulls took a breather on Tuesday, but remain optimistic that Japanese service sector data on Thursday and the key tankan corporate sentiment survey next week would encourage further inflows into the stock market. "Japan is definitely being re-rated upwards by foreign investors," said Mansoor Mohi-uddin, chief currency strategist at UBS. By 1150 GMT, the yen traded at 108.51 per dollar within sight of Monday's six-month peaks, and close to seven-week highs against the euro at 131.28 . Growing expectations of a Japanese economic rebound have also fed speculation that the Bank of Japan could end its long-standing ultra-low interest rate policy sooner than expected, sending Japanese Government Bond (JGB) yields higher. "There is still interest in how high JGB yields can go and whether that means the Japanese will keep repatriating (funds)," said Mohi-uddin. Higher returns on Japanese government debt has tempted domestic investors to bring money back home, in turn giving support to the yen.
EURO EASES, MARKET ON FEDWATCH
The euro dipped against the dollar and the buoyant yen after a key euro zone sentiment indicator failed to inspire. Germany's closely-watched ZEW institute investor confidence index posted its first rise of the year in June, improving to 47.4 points from 46.4 in May, but came in slightly below a analyst poll forecast of 48. "The euro came down a little bit after the ZEW but there's no reason why it should, the number was pretty much in line," said Lee Ferridge at Rabobank. The euro was a shade lower against the dollar from New York closing levels at $1.2092 . Ferridge added that the market was basically treading water ahead of next week's long awaited U.S. Federal Reserve interest rate-setting meeting (FOMC). "I see the markets as largely rangebound ahead of the FOMC. I think the Fed will hike by 25 basis points, but the balance of risk is still towards a 50 bp move. Euro/dollar might drift back towards $1.20 but I wouldn't look for more than that," he added.
JAPANESE TACTICS
The yen's five percent rise against the dollar over the past month is making dealers wary that Japan may return to the market to sell yen in a bid to protect the country's export competitiveness. Japanese authorities have not intervened in the foreign exchange market since mid-March, but Finance Minister Sadakazu Tanigaki told reporters on Tuesday that authorities were on their guard for "rapid moves that diverge from fundamentals." Tanigaki's position was later backed by his deputy, Vice Finance Minister for International Affairs Zembei Mizoguchi. "It will be interesting to see how much further the yen can improve against the crosses. If we get verbal intervention it's conceivable that this move won't go much further," said Mohi-uddin at UBS. The Japanese currency has rebounded sharply against high-yield currencies like sterling and the Australian dollar over the past few months as the improving economic outlook and a rising stock market caused investors to unwind their yen shorts.///