* Yen firm, seen testing Japan's willingness to intervene
* Dwindling U.S.-Japan yield gap seen hurting dollar
* Euro hits record low against Swiss franc
* Aussie rises vs USD on strong retail sales data
By Hideyuki Sano
TOKYO, Aug 31 (Reuters) - The yen rose towards a 15-year high
against the dollar on Tuesday as traders looked to test Japanese
authorities' resolve on intervention after the Bank of Japan's
easing steps the previous day failed to scare investors from
betting on it rising further.
With mounting U.S. economic worries seen keeping investors
away from risk assets such as high-yielding currencies, the
market is likely to push up the low-yielding yen, which could
eventually prompt Japan to sell its currency in the markets for
the first time in more than six years.
"Will they intervene today? No. But markets will become more
nervous if the yen approaches 80 yen (to the dollar)," said
Etsuko Yamashita, chief economist at Sumitomo Mitsui Banking
Corp.
"If a raft of U.S. economic data due this week pushes the yen
higher, Japan may indeed intervene," she said. On top of closely
watched jobs numbers on Friday, there is housing price data on
Tuesday and manufacturing data on Wednesday.
Traders said any Japanese intervention is likely to be a
unilateral action, given the perception that neither the United
States nor Europe would be keen to help boost the value of their
own currencies in light of weakness in their economies.
Japanese authorities are expected to buy the dollar against
the yen to curb the yen's strength if the dollar slides 3-4 yen
in one day, traders said.
Japanese Finance Minister Yoshihiko Noda repeated on Tuesday
that the government would take decisive action on currencies --
usually seen as code for intervention -- when necessary.
But reaction in the market was limited.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
PDF on Japan's yen dilemma: http://r.reuters.com/nef47n
Insider segment on the yen and Japanese growth with
RBS Securities Chief Japan Economist Junko Nishioka:
http://link.reuters.com/rer38n
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
The dollar slid 0.4 percent to 84.27 yen <JPY=>, edging near
the 15-year low of 83.58 hit last week. It fell 0.7 percent on
Monday as investors took profits after the Bank of Japan
announced its decision to expand a cheap funding programme.
CORRELATION WITH U.S. TREASURIES
The greenback fell nearly 2.6 percent against the Japanese
currency this month after sliding 2.2 percent in July and around
3 percent each in June and May.
As the dollar/yen rate has had a strong correlation in recent
months with the yield gap between the United States and Japan, a
sharp fall in Treasury yields on Monday also weighed on the
dollar.
Treasury prices jumped on Monday, with 30-year bond prices
rising two full points, recovering from a sharp sell-off on
Friday.
In addition, the yen could face potential buyback pressure in
cross-yen trades such as euro/yen and Aussie/yen, which have
attracted some interest because of their larger yield
differentials.
"Many stop-losses for Japanese margin traders are expected to
be triggered when the Australian dollar falls below 75 yen," said
a trader at a Japanese brokerage.
The Australian dollar fell 0.3 percent to 75.24 yen
<AUDJPY=R>, dented by a 3 percent fall in Tokyo's Nikkei stock
average <> that fuelled risk aversion among Japanese
investors.
Japanese retail margin traders boosted their combined net
long position in dollar/yen and six cross/yen pairs by 53,138
contracts, or 13 percent, to 461,456 contracts on Monday,
according to Tokyo Financial Exchange data. This boosted their
combined net long positions in seven major currencies against the
yen near a record high of 508,101 lots marked on Aug. 24.
If the yen keeps strengthening, margin traders will sooner or
later be forced to dump their heavy bets against the Japanese
currency, possibly adding momentum to its rise.
In another sign of investor risk aversion, the euro slumped
to a record low against the safe-haven Swiss franc on heavy
selling by emerging market players.
The euro fell as low as 1.2934 franc <EURCHF=R>, down 0.4
percent on the day.
The euro fell 0.5 percent against the yen to 106.65 yen
<EURJPY=R>, crawling towards a nine-year low of 105.44 yen hit
last week.
Against the dollar, the euro was little changed on the day at
$1.2659 <EUR=>.
It is expected to find some support around $1.2605, a 50
percent retracement of the euro's rally from June to early
August, and at a low of $1.2588 hit a week ago, although a break
below these levels could set off a fresh downward trend.
Some traders said recent rises in spreads of sovereign CDS in
some euro zone countries, such as Ireland and Italy, were
rekindling fears about the euro zone's debt problems, which
pushed the single currency to a four-year low earlier this year.
The Australian dollar climbed 0.3 percent to $0.8941
<AUD=D4>, after a stronger-than-expected reading in Australian
retail sales. []
(Additional contribution from Reuters Analyst Rick Lloyd in
Sydney and Rika Otsuka in Tokyo; Editing by Edmund Klamann)
