LONDON (Reuters) - The yen rose broadly on Wednesday, supported by seasonal flows from Japanese exporters buying at the end of their financial year, with an accumulation of short positions against the dollar looking vulnerable to a further squeeze.
The dollar fell 0.6 percent to 82.69 yen, while the euro shed 0.4 percent to 110.28 yen, pulling away from a 4-1/2 month high of 111.43 yen hit last week on trading platform EBS.
"Short yen versus the dollar has been the main theme of the quarter and the market seems to have taken it too far heading into the Japanese fiscal year-end," said John Hardy, currency strategist at Saxo Bank.
"If you look at US/Japan rate spreads, they are not supportive of where dollar/yen is at the moment," he added.
Investors pay close attention to the spread between two-year U.S. and Japanese government bond yields. That has narrowed significantly from highs earlier in the month of around 28 basis points to 21 basis points on Wednesday.
Yen buying by Japanese exporters tends to pick up steam at the month-end, and there has been additional focus on their potential flows recently as the financial year for most Japanese companies closes at the end of March.
Such seasonal factors helped spur yen-buying by Japanese exporters on Wednesday, despite the fact that some had already hedged their foreign exchange exposure for the next few months.
"They may have hedged all the way down to June or even beyond that, but there are always some orders one has to execute at the end of the financial term," said a customer dealer for a major Japanese bank in Tokyo.
Dealers said Wednesday was the deadline for fx transactions to be carried out in time to settle for the fiscal year-end.
The yen has been under pressure since the Bank of Japan's surprise monetary easing in February, when the central bank expanded its asset-buying scheme by 10 trillion yen and set an inflation goal of 1 percent.
The dollar hit an 11-month high of 84.187 yen earlier this month on trading platform EBS and traders said it remains strongly supported.
They pointed to stop-loss dollar sell orders which would deepen its fall on the day at around 82.60 with support the 21-day moving average around 82.44, which dollar/yen has held above on a closing basis since early February.
LOOSE MONETARY POLICIES
Market players say the loose monetary policies of major central banks such as the BOJ and the Federal Reserve may help support risk-taking. That in turn could prompt investors to sell the low-yielding yen to fund investment in more rewarding assets.
"I think there is more scope for yen strength in the near-term before it weakens against the dollar again and my one-year forecast is at 88 yen," said Hardy.
The dovish-sounding comments by Fed Chairman Ben Bernanke this week may help support risky assets in general, and could weigh on the yen, at least on the crosses, traders said.
Bernanke said on Tuesday it was too soon to declare victory in the U.S. economic recovery, warning against complacency in policy-making as the outlook brightens.
The euro rose 0.2 percent to $1.3343 but remained below a one-month high near $1.3386 hit on Tuesday.
The euro had come under pressure on Tuesday after hitting its one-month peak, as the safe-haven dollar edged higher, supported by a slight retreat in U.S. equities, market players said.
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