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 Measuring by the trade-weighted index used by the European Central
Bank, the euro rose on Tuesday past levels around 96 assumed by the
bank in its last forecasts, spurring speculation officials may seek
to talk the currency down.
The bigger debate for the moment is the yen, up 14 percent against
the dollar since mid-December, and the chances of either outright
intervention or, at some stage, far more aggressive policy action
from the Bank of Japan to weaken it.
A U.S. Treasury report on Friday sent a warning shot by saying that
"persistent one-sided" intervention to weaken the currency could see
countries with big trade surpluses classified as currency
manipulators and demand action.
No one expects it to come to that. But the report was taken as
another sign that U.S. officials are not comfortable with more
dollar gains. The greenback hit an almost 19-month low of 105.55 yen
overnight, having hit its weakest against the euro since last August
on Tuesday.
Against that were comments by San Francisco Federal Reserve
President John Williams that he would vote for a rise in interest
rates in June if economic growth was on track with his forecast and
jobs gains continue.
"There is the feeling that the activity by the U.S. Treasury could
have taken us into oversold territory with respect to the dollar,"
Rabobank strategist Jane Foley said.
"We have ADP jobs numbers today and then obviously we are thinking
about payrolls on Friday. If they are strong again, does that push
expectations for a rate rise higher again, does it create more
dollar strength? It will be interesting to see."
The dollar gained 0.2 percent to 106.75 yen <JPY=>, off earlier
highs, by 1125 GMT. It was up marginally on the day at $1.1491 per
euro, compared with Tuesday's low of $1.1616.
The gains against the yen came in thin market conditions, with
Japanese markets closed on Wednesday and Thursday for public
holidays.
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The yen last week saw its biggest weekly gain since 2008 - more than
5 percent against the dollar - as the Bank of Japan held off from
expanding its stimulus.
Position squaring ahead of U.S. jobs data later in the week is
probably supporting the dollar against the yen for now, said Stephen
Innes, senior trader for FX broker OANDA in Singapore.
"There's a huge, huge short position built into dollar/yen right
now," Innes said.
Goldman Sachs strategists called the yen higher in the short term
but said that would only put more pressure on policymakers to take
aggressive action later that would weaken it.
"There is little doubt in our minds that the dollar will keep
falling against the yen in the near term, until (BOJ) Governor
Kuroda is forced to respond with overwhelming force," they said in a
note.
Against a basket of six major currencies, the dollar edged up 0.2
percent to 93.117.
(Additional reporting by Masayuki Kitano in SINGAPORE; Editing by
Alison Williams)
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