* Dollar rebounds vs yen, underpinned by BOJ injection
* Dlr/yen outlook negative, but traders wary of BoJ action
* One-month dollar/yen implied vols spike
* Euro lifted as EU leaders agree to strengthen bailout fund
By Jessica Mortimer
LONDON, March 14 (Reuters) - The dollar rebounded from near
record lows against the yen on Monday after the Bank of Japan
announced a series of policy easing measures to shore up the
economy in the wake of a devastating earthquake and tsunami.
A surprise deal to boost Europe's sovereign bailout fund
lifted the euro against the dollar but the focus was on Japan,
with market participants wary of the risk that Japanese
authorities could intervene if the yen strengthens too much.
Traders said many investors had been caught long of yen on
expectations of repatriation flows after the disaster. They said
a combination of these factors could mean choppy trading for the
Japanese currency.
"The yen might gain from capital repatriation flows after
the quake, but the BOJ probably won't tolerate an excessive
rise," said Roberto Mialich, currency strategist at Unicredit in
Milan.
He said he did not expect the BOJ would allow the yen to hit
new record highs versus the dollar.
The dollar was up 0.05 percent at 81.94 yen <JPY=>, having
tumbled to a four-month low of 80.60 yen on electronic trading
platform EBS, 1 yen away from a historic trough of 79.75 yen hit
in 1995.
The yen was pushed off its highs after the BOJ doubled its
asset buying scheme to 10 trillion yen and supplied record funds
to banks on Monday to shore up confidence as Japan reeled in the
wake of the massive quake and tsunami. []
On Monday, the country was also battling to prevent a
nuclear catastrophe and to care for millions of people without
power and water in what was described as Japan's worst crisis
since World War Two. []
"The force from monetary policy -- liquidity injections and
increased risk of FX intervention -- will partially offset a
temporarily more yen-supportive capital flow picture," said Jens
Nordvig, global head of G10 FX strategy at Nomura Securities
International Inc in New York.
Overall, the bias on dollar/yen remains negative, with the
yen seen likely to extend gains if Japanese insurers try to
raise funds by selling overseas holdings.
Analysts said a break below 81.57 yen would make a target
80.93 -- roughly the low hit at the end of 2010 -- as the next
support, and a breach of this level would signal the resumption
of a downtrend.
On the upside, analysts said there is minor resistance at
82.38 yen and a move above that could turn the pair's bias to
neutral from negative.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
BOJ to debate easing policy further-Nikkei []
Bank lending marks 15th mth of falls in Feb []
Q4 GDP revised down, wholesale prices up []
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
VOLATILITY UP
Goldman Sachs strategist Thomas Stolper said repatriation
flows may only have a "relatively small positive impact" on the
yen as many Japanese institutional holdings of overseas assets
tend to be FX hedged. Foreign purchases of Japanese stocks,
which have recently accelerated, may also slow, which would be
"a marginal yen negative".
"The clearest currency impact from the earthquake may
therefore be an increase in volatility," he said in a note.
In line with the steep fall in dollar/yen earlier in the
global session, one-month implied volatility in the pair spiked
to a roughly four-month high at around 11.7 percent <JPY1MO=>,
from Friday's 9.65 percent.
Elsewhere, the euro was firmer against the dollar as
European policymakers surprised markets by making significant
steps over the weekend to tackle a debt crisis in peripheral
euro zone countries.
The euro was up 0.15 percent at $1.3928 <EUR=> -- well above
a low approaching 1.3750 hit on Friday -- after European Union
policymakers surpassed all expectations on Saturday by agreeing
to strengthen the euro zone bailout fund and make its loans
cheaper. []
Analysts said it may struggle to make more gains and retest
the $1.40 mark as investors cut exposure to risk in the wake of
the Japan quake, causing falls in equities and perceived
higher-risk currencies like the Australian dollar <AUD=D4>.
Analysts said the positive achievements from the summit
would focus the market's attention on the prospect of a likely
euro zone interest rate rise next month.
(Additional reporting by Gertrude Chavez in Tokyo; Editing by
Catherine Evans)
