* Yen recovers after knee-jerk reaction to earthquake
* Expectations of repatriation flows support yen
* Euro vulnerable, eyes on Friday's EU summit
(Adds quote, updates, adds details)
By Jessica Mortimer
LONDON, March 11 (Reuters) - The yen gained against the
dollar and the euro on Friday, buoyed by expectations that
repatriated funds could flow in to pay for repairs after a major
earthquake rocked Japan.
The yen recovered after an initial knee-jerk reaction to
sell the currency drove it to a two-week low against the dollar,
and analysts said it could stay choppy on near-term worries
about the impact on a shaky Japanese economy.
Worries about growth saw investors cut exposure to risk,
leading to selling of higher-yielding currencies. The euro was
also seen vulnerable to a sell-off if a euro zone summit later
in the day fails to ease concerns about sovereign debt.
The dollar held just above 82.00 yen, with traders reporting
large bids and stops at that level. Near-term support for the
dollar also lay near its March 7 low of 81.95 yen.
The dollar was down 0.8 percent at 82.24 yen <JPY=>, pulling
away from the two-week high of 83.29 yen hit in the Asian
session. Solid offers from Japanese exporters above 83 yen were
seen capping any upside for the U.S. currency.
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Euro zone crisis intensifies on summit eve []
Graphics: Credit ratings http://r.reuters.com/pyh48r
Euro zone's debt struggle http://r.reuters.com/hyb65p
Market reaction to Kobe earthquake
http://r.reuters.com/jec58r
For a column on the yen see []
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"There may be some upward pressure on the yen. There is a
worrying possibility that the yen could strengthen very fast
against the dollar over the next few months," said Jerome Booth,
fund manager at Ashmore Investment, which had assets under
management of $46.7 billion at the end of 2010.
The euro <EURJPY=R> also fell more than 1 percent to 112.94
yen, according to Reuters data, its lowest in more than a week.
The Bank of Japan said it would cut short its two-day
meeting next week to just one day and announce its decision that
day, while leaders of the ruling and opposition parties pushed
for an emergency budget. [] []
With rates at nearly zero, the BoJ does not have the scope
to cut borrowing costs as the Reserve Bank of New Zealand did
earlier this week in response to last month's Christchurch
earthquake.
Analysts said Japan is likely to take steps which will
further delay any gradual normalisation of monetary policy, and
this could prove negative for the yen.
"For now the yen's usual safe-haven characteristics are
offering it support, though the yen may be more volatile than
usual," said Jane Foley, senior currency strategist at Rabobank.
The yen, the U.S. dollar and the Swiss franc <CHF=> are
considered to be safe-haven currencies and are usually sought by
investors in times of economic uncertainty and financial stress.
The dollar index <.DXY> was steady at 77.250.
EURO ZONE WORRIES
The euro was kept under pressure, staying under $1.3800,
with traders citing concerns that Portugal may seek an external
bailout. It was steady <EUR=> at $1.3788, with traders
highlighting support above its 21-day moving average of $1.3749.
Euro zone leaders meet on Friday, ahead of a full 27-nation
European Union summit on March 24-25, to tackle a debt crisis
that has pressured the euro for a year.
Ahead of Friday's meeting, Portugal, one of the peripheral
countries investors are speculating might need a bailout from
the International Monetary Fund or the EU, announced additional
spending cuts and reforms to cut its deficit by an extra 0.8
percent of gross domestic product. []
"Until steps are taken to address the solvency side of the
EU debt problem, we doubt the market response would be positive
for long," said Derek Halpenny, European Head of global currency
research at Bank of Tokyo-Mitsubishi said.
Some analysts said a "buy-on-dips" strategy makes sense for
the euro as the prospect of a series of rate hikes by the
European Central Bank should underpin the currency this year.
But any gains run the risk of a pullback as sovereign debt
worries play out in the background.
Implied volatility on the euro versus the dollar edged
higher across the curve in line with the single currency's fall
in the spot market on Thursday. One-month implied volatility on
euro/dollar, for instance, rose to 10.4 percent from Thursday's
peak of 10.25. <EUR1MO=>
(Additional reporting by Niki O'Callaghan and Anirban Nag;
Editing by Ruth Pitchford)
