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Wed 24 Aug 2011 09:44 AM

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Dollar slightly lower after Japan statement on yen

Japan unveiled $100bn credit line to help companies deal with impact from a strong yen

Dollar slightly lower after Japan statement on yen
The euro and other risk-sensitive currencies such as the Australian dollar were under pressure as Asian bourses failed to track hefty gains made by Wall Street overnight (Getty Images)

The dollar fell slightly versus the yen after Japan unveiled
a $100bn credit line to help companies deal with the impact from a strong yen
but shied away from stepping into currency markets.

The dollar quickly came off an intraday high of 76.88 yen
hit after Moody's cut its rating on Japan's debt and as its crosses came under
broad pressure after S&P futures SPc1 fell 0.8 percent and gold gained 0.9
percent on renewed risk aversion.

The new credit line will facilitate companies' acquisitions
of overseas firms and their procurement of energy and resources from abroad,
but analysts were sceptical the measures will calm markets after the yen hit a
record high of 75.941 last week.

"The scheme treats the symptoms not the underlying
cause," said Todd Elmer, currency strategist at Citi in Singapore.

"So it's not going to have any impact whatsoever in
supporting dollar/yen, and given that there have been some expectations for
stronger measures ... I wouldn't be surprised if dollar/yen traded lower on the
day," he said.

Japan also said it would ask major financial firms to report
on FX positions held by dealers for the period to the end of September. The
potential impact from this is hard to gauge at this point, however, since it is
unclear what action Japanese authorities would take with such information,
traders said.

The dollar last traded slightly lower at 76.62, having
dipped to its session low of 76.53 after the Japanese government announced its
plan. The pair continued to be tethered to a slim band with bids seen below
76.50 and offers from exporters emerging above 76.80.

Moody's downgraded Japan by one notch to Aa3, blaming a
build-up of debt since the 2009 global recession and revolving-door political
leadership that has hampered effective economic strategies. Still, such cuts
have had scant effect on yields as the vast bulk of Japanese debt is owned by
the Japanese themselves.

The euro and other risk-sensitive currencies such as the
Australian dollar were under pressure as Asian bourses failed to track hefty
gains made by Wall Street overnight.

The euro came within a whisker of $1.4500 before trading
down 0.2 percent at $1.4407 . Traders cited ongoing concerns that the Greek
bailout package may be in jeopardy and about the state of the global economy
after weak data out of Germany.

A minister in Angela Merkel's conservative party propelled
Germany into a euro zone debate about guarantees for Greek aid, backing a
demand for collateral by Finland, which said it could quit the bailout programme
if its request was turned down.

Commodity currencies gave up some of the strong gains they
made the day before as manufacturing data in China and Europe was less grim
than feared. The Australian dollar was down 0.2 percent at $1.0495, having
climbed more than a cent to around $1.0535.

The Aussie was trapped between resistance at its 21-day
moving average around 1.0554 and support looming around $1.0331, its 200-day
moving average.

"The market is becoming more pessimistic about the
economic outlook and is responding by pricing in a greater chance of QE3,"
said Bricklin Dwyer, an economist at BNP Paribas.

Some investors are hoping Federal Reserve chairman Ben
Bernanke will use his speech at the central bank's annual symposium in Jackson
Hole, Wyoming, on Friday to prepare markets for more stimulus.

Last year, Bernanke used the meeting to bring up the idea of
the central bank's $600bn bond-buying programme that became known as QE2. That
pumped money and confidence into markets.

"The reality is that we are getting more data
confirming a slowdown in manufacturing activity and a dead cat bounce in the [US]
housing sector," BNP Paribas' Dwyer wrote in a client note.

But many Fed watchers, think Bernanke will be more
circumspect and the market could be disappointed.

"I think that Jackson Hole may actually be a huge
non-event with limited impact on dollar/yen," said a trader for a Japanese
bank who spoke on condition of anonymity.

"Surprisingly, the only effect from it may be renewed
pressure on the euro as the market's focus will turn to the euro zone debt
problems," said the trader.

The Swiss franc failed to benefit from risk aversion and was
almost unchanged on the day at 0.7928 as investors remained wary that the Swiss
National Bank could reenter markets to curb recent franc strength.

The SNB has cut interest rates to zero, flooded the banking
system with francs and intervened in the forward market to make returns on
francs less attractive to potential investors.

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