The U.S. dollar traded mainly in the lower 102 yen zone in Tokyo on Thursday as a risk-off mood over geopolitical tensions persisted, despite renewed expectations of Japanese pension fund diversification temporarily pushing up the currency.
At 5 p.m., the dollar fetched 102.28-29 yen compared with 102.06-16 yen in New York and 102.51-52 yen in Tokyo at 5 p.m. Wednesday. It moved between 102.04 yen and 102.46 yen during the day, changing hands most frequently at 102.16 yen.
The euro was quoted at $1.3372-3373 and 136.77-81 yen against $1.3379-3389 and 136.61-71 yen in New York and $1.3371-3373 and 137.07-11 yen in Tokyo late Wednesday afternoon.
The dollar traded languidly in the lower 102 yen zone in the morning amid muted risk sentiment, failing to recoup losses from a sharp drop in New York overnight on heightening fears over the Ukraine crisis, said Toshiyuki Suzuki, senior market economist at the Bank of Tokyo-Mitsubishi UFJ.
"As tensions flare up over Ukraine, including reports of a Russian military buildup and Russia's pledge to retaliate against sanctions, we are seeing a flight to quality and demand for assets perceived as less risky, including the yen," Suzuki said.
The dollar spiked into the mid-102 yen zone in the afternoon after Reuters news agency reported Japan's largest pension fund, the Government Pension Investment Fund, is set to devote more than 20 percent of its portfolio to domestic stocks as part of a pivot toward higher yielding assets, said Yuji Saito, executive director of foreign exchange at Credit Agricole Corporate & Investment Bank in Tokyo.
"We've known for some time that the GPIF will increase its investment in stocks, but the wording of 'more than 20 percent' rather than the 'around 20 percent' we've been hearing until now spurred primarily overseas traders into action," Saito said.
The effect is likely to be temporary, however, and whether the dollar can find a firm footing over the 200-day moving average around 102.27 yen in overseas trading time is key to concluding whether Wednesday night's slump on risk aversion will prove to be a one-day event, Saito added.
The euro remained low against the yen in Tokyo but recouped its losses against the dollar triggered by the release overnight of Italy's April-June quarter gross domestic product data.
The GDP data showed the country slipped back into recession, which combined with soft German June factory orders data spurred speculation the eurozone is veering off the path to recovery and turned investors off the common currency, Suzuki said.
The European Central Bank is not expected to announce any policy changes after its meeting set for later in the day, but "traders are watching for comments by (President Mario) Draghi and other policymakers about the state of the eurozone, the prospect of introducing quantitative easing to ward off deflation and the impact of the Ukraine conflict," Suzuki said.