* Yen recovers after knee-jerk reaction to earthquake
* Expectations of repatriation flows support yen
* Euro up vs dollar; euro zone agrees competitiveness pact
(Updates prices)
By Steven C. Johnson and Nick Olivari
NEW YORK, March 11 (Reuters) - The yen soared on Friday
after the worst earthquake on record to hit Japan spurred a
safety bid, and it could rise further next week if insurers
scramble to raise cash by selling their foreign assets.
The yen initially fell to a two-week low against the dollar
but then shot higher as the full extent of the devastation
became clear. The quake triggered a ferocious tsunami, killing
at least 1,000 people. For more, see []
Worries about the impact on a fragile Japanese economy
prompted investors to cut exposure to risk, traders said, with
Japanese investors who had used cheaply borrowed yen to invest
abroad bringing the money back home.
The dollar fell 1.2 percent to 81.87 yen <JPY=EBS>, its
biggest one-day decline since Dec. 3, while the yen also
rallied against the euro, pound and Swiss franc.
The euro, meanwhile, rose 0.8 percent to $1.3903 <EUR=EBS>
after leaders reached a deal to establish higher retirement
ages, more flexible labor markets and debt and deficit limits
for euro zone countries. []
RETAIL INVESTORS TO DETERMINE YEN DIRECTION
The yen's gains were similar to those seen following a
severe 1995 earthquake, and Dennis Gartman, editor of The
Gartman Letter, told Reuters the yen could soon strengthen to
75 per dollar on repatriations. [].
"If you look at the earthquake in 1995, that also resulted
in yen strength," said Michael Woolfolk, strategist at BNY
Mellon. "Japanese investors that have been heavily invested
overseas bring it back home in periods of risk aversion."
Analysts said Japanese insurance firms could prove to be
heavy yen buyers in the days and weeks ahead as they sell
foreign assets to pay damage claims.
Investors were watching the bond market for signs of
repatriation, but Jens Nordvig, FX strategist at Nomura
Securities in New York, suggested the bigger downward impact on
dollar/yen, if the current trend lasts, will be a loss of
appetite by retail investors for foreign investments.
Retail investor outflows had been picking up over recent
months and a reversal might stall dollar gains. Nordvig also
distinguished between life insurance firms that are big foreign
investors and disaster insurance firms that invest locally.
"I'm confident (a large decline in Treasuries) is not going
to happen because life insurance companies are the ones that
hold a lot of foreign assets and they won't be the ones paying
out," he said.
Brian Dolan, chief strategist at Forex.com, said dollar
losses should bottom out around 80.50 yen, adding that
insurance claims may not be as high as feared since the area
that sustained the most damage is largely agricultural.
Still, RBC Capital Markets technical strategist George
Davis said the dollar "must register a daily close above 83.05
yen in order to produce a bullish breakout and nullify the
downside risks that have appeared today."
Downside targets include 80.94 and 80.25, he said.
YEN INTERVENTION RISKS, EURO ZONE DEAL
A move to 80 yen "is likely to be a line in the sand" for
Japanese authorities, already vexed by an anemic economy, and
could provoke intervention, said Jessica Hoversen, foreign
exchange and fixed income analyst at MF Global in Chicago.
Japan's intervention in September -- the first in 15 years
-- slowed the pace of yen gains but failed to reverse them.
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 earthquake.
Euro zone leaders' deal on a competitiveness pact is
expected to be adopted formally at a full 27-nation European
Union summit March 24-25.
The currency got an earlier boost after Portugal, one of
the countries investors fear may need a bailout, announced
additional spending cuts to curb its deficit.[]
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.
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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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(Reporting by Steven C Johnson and Nick Olivari in New York
and Jessica Mortimer in London; Editing by Leslie Adler)
