The yen had its biggest decline against the dollar in two weeks after Japanese Finance Minister Masajuro Shiokawa said the government may counter "speculative activity" in the currency market.
Demand for yen fell as some traders bet the Bank of Japan would sell its currency this month. The Bank sold about ¥700 billion (US$5.87 billion) in January in an attempt to reverse last year's 11 percent rally against the dollar, which is crimping the country's export-led recovery. It also sold ¥4.02 trillion last May and June.
"The fact that they successfully intervened in the second half of January has put the market on notice that they could use this tool again," said Robert Lynch, a New-York based currency strategist at BNP Paribas, France's biggest bank. Speculation mounts the bank is selling yen whenever the currency strengthens to about Y118 per dollar, he said.
The yen weakened to ¥118.70 at 4:18pm in New York from ¥118.34 late yesterday. Japan's currency strengthened to ¥127.74 per euro from ¥128.07. The dollar extended gains as US stocks rose, lifting the Standard & Poor's 500 Index 1.3 percent.
Noting that he had seen "some speculative activity" in the yen, Shiokawa said the government "should think about how to counteract such speculative moves."
In the past five days, the yen advanced 1.5 percent against the dollar, its biggest weekly gain in 10 weeks. It rose 1.5 percent against the euro this week, the most since March 8.
A rise in the yen's value is hurting sales at Japanese companies with overseas operations such as Sony Corp and Toyota Motor Corp, threatening the government's efforts to boost exports and avert a fourth recession in a decade. The world's second-biggest economy expanded 0.3 percent last year, and exports account for about 11 percent of output.
"Traders know the Bank of Japan has been pretty active in defending the country's exporters from rapid gains in the currency," said Andrew Pyle, a senior markets economist at Scotia Capital in Toronto.
"They've made numerous comments, and there's always a real possibility of the Bank of Japan entering the markets."
In the previous six trading days, the dollar lost 2.6 percent against the yen. That decline made it ripe for a rebound, according to the relative strength index, analysts said.
The rate for dollar-yen had fallen to 19.1 yesterday, the lowest since Jan. 1. A reading below 30 generally implies the momentum of the currency's move is close to stalling. The index calculates the degree daily losses outpace gains to identify possible turning points in a currency's price.
The dollar strengthened for a third week in four against the euro to US$1.0763 per euro from US$1.0792 on Feb. 14.
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