The dollar failed to hold above the 118.25 level on Monday and there were further gains for the Japanese currency in Asian trading on Tuesday...

... with the yen strengthening to 117.25 in early Europe.

There has been further speculation
over a near-term tightening of monetary policy by the Bank of Japan, especially
with a reported drop in corporate bankruptcies, and this has encouraged a
further reduction in short yen positions. This optimism is likely to be
sustained in the short term. Seasonal repatriation will also tend to offer yen
support in the short term and this will underpin the capital account. Without
substantial capital outflows, the underlying capital account pressures will put
upward pressure on the yen, increasing the risk of capitulation on short yen
positions.

Overall dollar confidence is still
firm which will limit the extent of yen buying while expectations of higher US
interest rates remain intact. The yen will be in a position to secure further
strong gains against the dollar if US interest rate expectations falter
following the Fed's testimony on Wednesday.


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