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The dollar rose as high as 119.15 yen <JPY=> on
the EBS trading platform, its highest since July 2007,
immediately after the rating decision was announced. It ran into
profit-taking and was last trading at 118.48 yen, down 0.1
percent on the day.
Japanese stock futures <.N225> - which tend to rise when the yen
drops against the dollar and vice versa - eased after the
downgrade, helping the yen to recover, traders said.
Moody's cut Japan's rating to A1 from AA3 and assigned a stable
outlook to its debt. The downgrade came less than two weeks
before Japanese Prime Minister Shinzo Abe seeks re-election in a
snap poll where his stimulus policies and a decision to delay a
second sales tax hike will be key issues.
"The yen was under pressure for most of the day so what we are
seeing is a bit of a 'buy-the-rumour-sell-the-fact' reaction to
the Moody's announcement," said Jeremy Stretch, CIBC World
Markets' head of currency strategy in London.
"Once the knee-jerk reaction is out of the way, the downgrade
underlines Japan's fiscal problems and should offer
opportunities to put fresh long bets in favour of the dollar and
sell the yen."
The euro also climbed against the yen to 147.70 yen <EURJPY=>.
But the common currency looked likely to run out of steam
against the dollar <EUR=> as lower commodity and oil prices
added to expectations that the European Central Bank would ease
policy further to combat deflationary risks.
Traders expect the ECB to lay the groundwork for further easing
later this week. Final purchasing managers' index surveys from
Germany and France showed that activity remained sluggish.
"Although we do not expect an announcement on quantitative
easing just yet, we think President (Mario) Draghi will continue
to manage expectations well, meaning that room for a euro short
squeeze is likely to be limited," said ING strategist Petr
Krpata.
The euro rose to a three-week high of 1.2042 Swiss francs <EURCHF=R>
from about 1.2018 on Friday. Investors who had bought the franc
against the euro were forced to unwind those bets on Monday
after the Swiss rejected in a referendum an initiative which
would have forced the Swiss central bank to buy more gold.
The defeated "Save our Swiss gold" initiative would have
compelled the Swiss National Bank (SNB) to boost its gold
reserves to 20 percent of its assets, from about 8 percent, and
stopped it from selling the metal. That would have threatened
its ability to defend a 1.20 euro cap.
(Editing by Gareth Jones)
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