Yen nursing losses, euro best of bad bunch

By Wayne Cole

SYDNEY | Thu Jan 27, 2011 6:31pm EST

SYDNEY (Reuters) - The yen nursed broad losses on Friday after Standard & Poor's cut Japan's credit rating by a notch, though it fared relatively better against the U.S. dollar which had troubles of its own.

Late Thursday, Moody's reminded investors that it might turn negative on the U.S. rating outlook within the next two years given how the budget deficit continued to swell
"Once this knee-jerk reaction fades, the USD could be dragged down by its own fiscal concerns," said analysts at CitiFX in a note to clients. "We favor long positions in cross-JPY as a means of positioning for additional JPY depreciation."
Indeed, after initially rallying a big figure to as high as 83.22 yen, the dollar had lapsed to 82.87 in early Asia trade on Friday. In contrast, the euro held most of its 1 percent gain at 113.71 yen, after hitting a two-month peak around 114.00.
CitiFX said the downgrade could prove to be a catalyst for investors to focus more on the relative fiscal stance of major economies.
"Smaller countries that enjoy stronger fiscal conditions such as Canada and Australia should be the medium-term beneficiaries," they argued. "This argues for long cross-JPY positions."
One country doing particularly well has been Sweden where a barnstorming recovery has made the crown the best-performing currency so far this year. The euro hit a decade low on the crown this week, while the U.S. dollar dived to its lowest since September 2008.
The single currency was faring rather better on the U.S. dollar to stand at $1.3726, having been as far as $1.3760 for the fourth straight session of higher peaks.
It was supported in part by more hawkish sounding words from European Central Bank policy maker Lorenzo Bini Smaghi who said an expected rise in imported goods inflation could be ignored.
That was just the latest hawkish comment from ECB policy makers which have given the market the clear impression that the bank is likely to tighten well ahead of the Federal Reserve.
The next chart barriers for the euro are the November 22 high of $1.3786 and the peak from Nov 10/11 at $1.3826. Breaks here could unleash a further retracement to $1.4283.
A slew of Japanese data is due later Friday including consumer prices, retail sales and unemployment.
"Japan's data might get a bit more attention in the wake of the S&P news, but more likely not," said David Watt, a senior strategist at RBC Capital Markets, in a note. "Instead, the focus will be on U.S. data, including the first print of Q4 GDP."
Gross domestic product (GDP) is forecast to have grown an annualised 3.5 percent last quarter, up from 2.6 percent the previous quarter and analysts have become increasingly bullish on the current year.
A strong number could help the U.S. dollar against the euro, but it would also tend to benefit risk trades in commodities and equities and growth-leveraged currencies like the Canadian dollar.