* Japan intervenes for first time in six years
* Dollar rises to 85.77 yen, runs into strong offers
* Key resistance above 86 yen still untested
(Updates throughout, adds comment, detail)
By Steven C. Johnson
NEW YORK, Sept 15 (Reuters) - The dollar rose more than 3
percent against the yen on Wednesday as Japan intervened to
weaken its currency for the first time in six years, kicking
off what could be a sustained effort to limit yen strength.
Dealers said the Bank of Japan spent close to $20 billion
to weaken the currency against the dollar, which staged its
biggest daily gain against the yen in nearly two years.
By mid-morning in New York, the dollar had climbed as high
as 85.72 yen <JPY=>, up from a 15-year low beneath 83 yen. It
last traded at 85.63 yen.
The euro, sterling and Australian dollar also soared as a
result of the Japanese intervention, which the Ministry of
Finance said was carried out without any foreign assistance.
The timing caught markets off guard, coming after Prime
Minister Naoto Kan won a party leadership election over a
challenger who was a more strident advocate of intervention.
It also came when speculators were heavily positioned in
favor of the yen, forcing them to buy back the dollar
aggressively and accelerating greenback gains.
"If you're going to trade this, I would not try to lean
against the BoJ right now. This has caught a lot of investors
on the back foot, and I expect the BoJ will have the upper hand
for the next few days," said Mike Moran, senior strategist at
Standard Chartered in New York.
Among winners on Wednesday were Japanese exporters who were
able to exchange dollar earnings above 85 yen. Some analysts
said China was likely to welcome Japan's moves as it would
dampen U.S. pressure on Beijing to allow its own currency to
rise against the dollar.
LINE IN THE SAND AT 85?
A softer yen makes Japanese exports cheaper and boosts
company profits, relieving pressure on a fragile economy.
Nomura currency strategist Jens Nordvig said Japan will try
to keep the dollar above 85 yen and said it could get as high
as 87 yen in the days ahead. But he said a weak U.S. outlook
would eventually push it back below 83 yen by year-end.
New York traders said a weaker dollar-yen trend would
remain intact until the dollar tests 86.70, the 38.2 percent
retracement of its June-to-September decline.
"Beyond that, though, history has told us that unilateral
action by a central bank has a very low success rate, and until
we see a meaningful shift in the conditions that have led to a
strong yen, the balance of risk is tilted toward a firm yen,"
said Moran.
A 15-month Japanese intervention campaign that ended in
2004 cost about 35 trillion yen and achieved mixed results.
UPHILL BATTLE
The Bank of Japan started buying the dollar around 0130 GMT
on Wednesday and has been active since, with $2-3 billion spent
in early New York hours, traders said. [].
Billionaire financier George Soros told Reuters Insider on
Wednesday that Japan was right to weaken the yen,[]
CitiFX strategists said many investors appeared to open
short dollar-yen trades at "unattractive levels," which
suggests the unwind of those trades may aid BoJ efforts.
"Obviously, it will take more than a couple big figure
rally to drive a big shift in positioning, but....it does not
look as if the initial rally is yet stretched," they wrote in a
note to clients and suggested buying the dollar on dips.
But preventing yen strength could prove difficult if the
Federal Reserve decides to pump more money into the U.S.
economy to prevent a faltering recovery from stalling.
Recent signs of weakness in the U.S. economy have narrowed
the gap between U.S. and Japanese bond yields, prompting
investors to ditch dollar-denominated assets and buy yen.
U.S. yields fell on Wednesday, as investors bet that Japan
would recycle some of their massive dollar purchases into U.S.
government debt. []
"There is a potentially 'vicious circle' dynamic to it,"
Nomura's Nordvig said.
It remains unclear whether this will happen, though as
sources familiar with the matter said the BOJ was ready to
leave the intervention unsterilized rather than drain the funds
that went into the currency market.[]
The euro rose 3.2 percent to 111.40 yen <EURJPY=>, on track
for its best day since February 2009, while the Australian
dollar <AUDJPY=R> rose 3.3 percent and sterling 3.7 percent
<GBPJPY=R>. The euro fell 0.1 percent to $1.3008 <EUR=>.
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For dollar/yen correlations: http://link.reuters.com/wyn43p
For PDF on the yen's rise http://r.reuters.com/zuz33p
For graphic on intervention http://link.reuters.com/qep63p
For Reuters Insider on yen http://link.reuters.com/sav63p
and http://link.reuters.com/peb53p
For Breakingviews on BOJ intervention []
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(Additional reporting by Gertrude Chavez-Dreyfuss, Vivianne
Rodrigues, Wanfeng Zhou and Nick Olivari in New York and
Jessica Mortimer in London; Editing by Andrew Hay)
