The yen rebounded from a 2-1/2-year low on Tuesday after Japanese Economics Minister Akira Amari’s remarks that excessive yen weakness could have a negative impact on the country sparked profit-taking in heavy bets against the Japanese currency.
The dollar was also weighed down by comments from the head of the Federal Reserve suggesting the U.S. central bank was in no hurry to withdraw monetary stimulus from the world’s biggest economy.
The dollar dropped about 0.6 percent to 89.95 yen on the day, having fallen as low as 88.62 point at one point after Amari said excessive yen weakness could hurt the livelihood of people by boosting import prices.
On Monday, the dollar rose as high as 89.67 yen, its highest level since June 2010, as many traders had sold the yen aggressively in recent weeks on expectations the Bank of Japan will be forced to take bold action to jump-start a sluggish economy.
The BOJ is under unrelenting pressure from newly elected Prime Minister Shinzo Abe to beat deflation once and for all.
Earlier, the U.S. currency also failed to extend its recent gains to test the big number of 90 yen as U.S. Fed chief Ben Bernanke said the recovery was still fragile and warned the economy was at risk from political gridlock over the deficit.
His comments also came after the president of the San Francisco Federal Reserve Bank, John Williams, said he expected the central bank’s bond buying would be needed “well into the second half of 2013.”
“Overall, these remarks do not change our view that QE3 will continue into at least the end of 2013 as the recovery remains moderate, while we also see downside risks for the economy stemming from the debt ceiling uncertainty,” said Vassili Serebriakov, strategist at BNP Paribas.
The Fed’s stance stood in contrast to a more upbeat European Central Bank, which recently said the euro zone economy will recover later in 2013 and there are already signs of stabilisation.
Against this backdrop, the euro was buoyed near an 11-month high, with receding worries over a full-blown financial crisis in Europe encouraging investors to shift some funds back to the euro.
The euro last traded at $1.3375, flat on the day after having risen as far as $1.3404 on Monday, its highest level in 11 months. Immediate resistance was seen around $1.3490, a level that had capped the currency last year.
The single currency outperformed many of its peers over the last few sessions.
One standout performance on Monday was the euro’s 1.2 percent rally against the Swiss franc, taking it well above 1.2300 francs for the first time since December 2011.
“It had lagged the rise in EUR/USD and is now busy gapping aggressively higher and taking out layer after layer of strikes. It is happening very quickly,” said Sebastien Galy, strategist at Societe Generale.
“Market makers are panicking leading EUR/CHF vols to move explosively higher in the front end. The next layer of strikes is reportedly between 1.24 and 1.25, though looking at price action it seems that we hit a layer of strikes every 20 pips or so.”
The euro also held near a nine-month high against the British pound, last trading at 0.8311 pound after having risen as high as 0.8326 on Monday.
Against the yen, the euro scaled a fresh 20-month peak of 120.13 on Monday before Amari’s comments lifted the yen from lows. It last stood at 119.02 yen.