After a recovery back to 111.9, the dollar weakened back to 111.3. There is the
possibility...

... that there will be a more aggressive covering of short yen positions
which could strengthen the Japanese currency sharply, especially if the dollar loses
support at the 111.0 level.

There is greater fundamental optimism over the Japanese economy which will offer
some background support to the Japanese currency. The Nikkei index remained firm on
Wednesday with an increase to a 15-month high before a slight retreat. The optimism
over the economy is reflected in a rise in 10-year bond yields to a 4-month high.

DISALLOWED (RandomQuote)

Bank of Japan Governor Fukui reported that prices could start to rise from late this
year which will maintain speculation over a monetary tightening and the Bank of
Japan will let the level of deposits in the banking system fall below the
JPY30-35trn target. Overall yield considerations will still lessen the potential for
short-term yen gains given that US yields are above 4.4% while Japanese yields are
1.35%.

There will still be caution ahead of the postal reform vote in the Upper House which
is scheduled to take place on Friday, although this could be delayed until next
week. Concerns that the government could lose the vote will limit the potential for
near-term yen buying. Reform approval could offer significant yen support,
especially as the yen tends to be strong during August.

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