Tokyo - The yen pulled back from 15-year highs on the dollar and a nine-year peak on the euro on Wednesday due to chances that Japanese authorities may take steps such as yen-selling intervention to stem the yen's rise.
The caution initially stemmed from a Nikkei business daily report saying Japan's Ministry of Finance may consider unilateral yen-selling market intervention if speculators drive up the currency.
Finance Minister Yoshihiko Noda reinforced that view, telling reporters on Wednesday that recent yen moves were one-sided and Tokyo will respond appropriately when necessary.
The yen's surge has also nudged up the previously negligible chances of monetary easing by the Bank of Japan before its September 6-7 rate review, sources told Reuters. The most likely step would be to expand the amount or extend the duration of a short-term funding operation.
Japanese Prime Minister Naoto Kan said he feels a sense of crisis over the strong yen and wants to show a firm response soon, Jiji news agency reported on Wednesday. But Noda said he had not received any specific instructions from the prime minister on currency issues.
Traders were also closely watching the Nikkei average, which fell over 2% to a 16-month low, calculating that the steeper its losses the more possible it is that Japanese authorities might finally bite the bullet and intervene.
"Combining the Nikkei's report, and comments from the prime minister and finance minister, the market view on the possibility of Japan's intervention if the yen appreciates further has been raised," said Tomohiro Nishida, treasury deparment manager at Chuo Mitsui Trust and Banking.
"But it's a question of whether Japan will intervene at the current forex level."
The dollar rose 0.4% against the yen to ¥84.25 on short-covering, having pulled up from a 15-year low of ¥83.58 hit on trading platform EBS on Tuesday. There was also some talk of dollar-buying by Japanese importers.
Traders said, however, that the dollar's gains were likely to be limited with selling interest seen likely to emerge if it rises toward ¥85.00.
Some were sceptical about just how effective any intervention by Japan alone would be.
"The bottom line is that it will be difficult to reverse the yen's firm trend completely even with monetary easing by the BOJ, which the market has priced in, along with solo intervention by Japan," said Jun Kato, senior manager of investment at Shinkin Asset Management.
"Such moves by the Japanese authorities might weaken the yen temporarily but there are market players who are waiting to sell the dollar on its rise. There's a possibility the yen may strengthen even more."
Traders said the dollar's fall could accelerate if it drops below ¥83.50, at which the greenback had strong support in June 1995 after hitting its all-time low of ¥79.75 in April of that year. There is talk of option barriers on the downside at levels such as ¥83.00, they said.
The euro climbed 0.5% to ¥106.52 after touching a nine-year low of ¥105.44 on EBS on Tuesday.
But the market mood is still one of yen buying as the latest dismal US home sales data and a renewed slide in stocks has sent investors scrambling for safe-havens.
Japanese retail margin traders' combined net long position in dollar/yen and six cross/yen pairs swelled to 508 101 contracts as of Tuesday, the highest on data going back to July 2006, according to Tokyo Financial Exchange data.
An analyst at an FX trading firm says many retail investors strongly believe the Japanese authorities will step into the market, prompting them to bet against the Japanese currency.
The euro's upside was limited after Standard & Poor's downgraded Ireland to AA- and warned the outlook was still negative, fanning worries about eurozone sovereign debt and the banking system.
The euro inched up 0.1% to $1.2643 after touching a 6-week low of $1.2588 on EBS on Tuesday.
The single currency fared less well against the Swiss franc, collapsing to a record low around 1.3015 francs before edging back to 1.3032 francs, down 0.1% on the day.
A 27% drop in existing US home sales caused much of the damage, knocking the S&P 500 down 1.5% and sending Treasury yields to new lows.
The data was so bad it sparked talk that the Federal Reserve could embark on a fresh round of quantitative easing, which seemed to tarnish the US dollar's claim to be a safe haven.