* Market seen testing Japan's willingness to intervene
* Dwindling U.S.-Japan yield gap seen hurting dollar
* Euro hits record low against Swiss franc on risk aversion
(Adds detail, updates prices)
By Anirban Nag
LONDON, Aug 31 (Reuters) - The yen came within reach of a
15-year high against the dollar on Tuesday as investors shrugged
off the Bank of Japan's latest policy easing, betting instead on
more yen gains that would test official readiness to intervene.
With mounting U.S. economic worries likely to keep investors
away from riskier assets such as stocks and high-yielding
currencies, the market may push up the low-yielding yen.
That could eventually prompt Japan to sell its currency in
the markets for the first time in more than six years.
"Japan's ministry of finance is sending signals that it is
willing to intervene but clearly people remember its struggle
with intervention a few years ago," said Simon Derrick, head of
currency research at Bank of New York Mellon.
"If they don't intervene when the yen is at 84, when will
they do it? Once it goes to all-time lows? I think their resolve
... will be tested."
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 the
reaction in the market was limited.
On Monday, the BOJ boosted a cheap loan scheme to banks, in
a move that was probably the least it could do for now.
But traders said the policy response to the yen's strength
has been insufficient given the current sentiment and lack of
appetite for a co-ordinated policy response from other G8
nations, who are grappling with their own problems.
At 1117 GMT the dollar was down 0.3 percent at 84.32 yen
<JPY=> after falling to 84.06, not far from its 15-year low of
83.58 hit last week. The greenback has fallen more than 2.5
percent against the Japanese currency this month after sliding
2.2 percent in July.
The euro was down 0.2 percent on the day at 106.90 yen
<EURJPY=R>, off an earlier low of 106.19 and up from a nine-year
low of 105.44 yen hit last week. Traders said the euro was being
underpinned by month-end demand.
Traders say 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. For Q+A on will Japan intervene to
curb the yen's rise, click on [].
"There is a tug-of-war that is taking place between Japan's
Ministry of Finance and the BOJ and the markets are aware of
that," said a currency strategist at a Japanese bank in London.
"Even if they decide to intervene, the dollar's topside will be
capped with option strikes at 86-87 yen levels."
Analysts said a raft of U.S. economic data due this week
could also push the yen higher. On top of closely watched jobs
numbers on Friday, there is housing price data on Tuesday and
manufacturing data on Wednesday.
Minutes from the Federal Reserve's last board meeting will
be released on Tuesday and investors will get further insight
into divisions within the Federal Open Market Committee and its
August 10 decision to buy longer-term Treasury securities.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
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
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
CARRY TRADE UNWINDING
The dollar/yen rate has had a strong correlation in recent
months with the yield gap between the United States and Japan.
So a fall in Treasury yields also weighed on the dollar.
In addition, the yen could face potential buyback pressure
in cross trades such as euro/yen and Aussie/yen, which have
attracted some interest because of their larger yield
differentials.
Derrick at Bank of New York Mellon said the collapse of one
of New Zealand's largest finance companies was leading to some
carry trade unwinding and was hurting high-yielding currencies
like the Australian dollar against the yen. []
In another sign of investor risk aversion, the euro slumped
to a record low against the safe-haven Swiss franc, removing
barriers at 1.2900 on the way lower. The euro fell as low as
1.2898 francs <EURCHF=R> on trading platform EBS.
Against the dollar, the euro was marginally higher at
$1.2680 <EUR=>, helped in part by strong job numbers from
Germany. []. The dollar also fell to a seven-month
low of 1.0173 francs <CHF=>.
(Additional reporting by Neal Armstrong, editing by Hugh
Lawson)
