Dollar spikes vs yen on intervention, Asian shares fall

Asian shares fell and precious metals slipped as the dollar spiked to a three-month high against the yen following Japan's intervention, prompting investors to book profits after last week's rally. The dollar rose more than 4 percent against the yen to above 79 yen, hours after briefly falling to a record low of 75.31 yen since World War II. The dollar index as measured against six major currencies rose 1.3 percent. Japanese Finance Minister Jun Azumi said Japan intervened unilaterally in the foreign exchange market on Monday but declined to comment on the size of the intervention. The dollar's rally sent gold down more than 1 percent and silver down more than 2 percent. The Nikkei, which was down as much as 0.6 percent earlier, reversed course to rise nearly 1 percent as the yen slid. The yen's persistent strength has raised worries about Japanese companies' earnings. The dollar has come under pressure as investors cautiously returned to risker assets after Europe laid out a basic framework to tackle its debt crisis last week. "A weak dollar, short-covering and an overbought market since the beginning of October was enought to trigger a correction [as the dollar spiked]," said Colin Bradbury, Daiwa Capital Markets' regional chief strategist for Asia ex-Japan. After ralling strongly to a technically overbought territory, the markets were ripe for profit taking," he said. MSCI's broadest index of Asia Pacific shares outside Japan fell 0.9 percent on Monday, after posting its best week in nearly three years as a long-awaited plan to resolve the European debt crisis sparked a huge relief rally. MSCI's all-country world stock index was up 0.5 percent late on Friday, after hitting its highest level in nearly three months and posting its best week since July 2009. US stocks ended mixed on Friday, closing out a fourth week of gains. October also was on track to be the best month for stocks since 1974, supported by strong earnings. Merck & Co Inc and Chevron Corp both topped expectations with financial results on Friday. The CBOE Volatility index VIX - a 30-day risk forecast of volatility in the S&P 500 - fell on Friday to its lowest in nearly two months. Investors were shifting their focus for now from Europe to key events such as the Federal Reserve's monetary policy meeting and US economic data, including jobs, due later this week to gauge the state of the world's largest economy. "The momentum for risk appetite remains intact and the pressure on the dollar is expected to stay while the market shifts its focus from Europe to US data and the Fed," said Junya Tanase, chief strategist at JPMorgan Chase in Tokyo. "The follow-through buying of equities around the world after the European summit suggests there were other factors supporting sentiment, such as expectations for more US easing, hopes the US economy and corporate earnings will not be too bad," he said. The euro fell 0.8 percent as the dollar rallied on Japanese intervention. The single currency reached a seven-week high around $1.4247 last Thursday, and looked set to end the month up nearly 6 percent for its best monthly performance in just over a year. But uncertainty about a possible interest rate cut on Thursday by the European Central Bank could limit its upside for now. A weak sale of Italian bonds on Friday also underscored fragility of the eurozone's debt progress. The 10-year yield gap between Italian and German bonds widened after the auction to 378 basis points, about 10 bps wider on the day. Italy paid record high cost of more than 6 percent to borrow on the debt market, in the first eurozone bond auction after policymakers struck an agreement on Thursday to slash Greece's debt burden and strengthen the European Financial Stability Facility, the region's rescue fund. Details to implement the agreement remain unresolved, with one of the key issues being raising funds for the bailout vehicle. The head of the EFSF played down hopes of a quick deal with China to throw its support behind efforts to resolve the crisis. Asian credit markets were stable, with the spreads on the iTraxx Asia ex-Japan investment grade index  a gauge for whether investor risk appetite is returning, little changed on Monday. The markets may come under pressure as issuers were eyeing the short windows of opportunity in the last quarter of the year, following nearly two months of inactivity, while also feeling tempted to launch their debt offerings after improving fund flows to the region. In the week to October 26, emerging-market bond funds saw sustained inflows, with $4.8 bn into high-yield funds, the biggest since fund tracker EPFR Global started keeping records in 2003. Local currency bond funds reported the first positive inflows after five straight weeks of outflows, while hard-currency bond funds logged the second consecutive week of inflows on the heels of four weeks of outflows.