Yen strengthens as Japan considers nudging pension funds into domestic assets

By Chuck Mikolajczak

NEW YORK, July 10 (Reuters) - The yen climbed on Friday and was on track for its biggest daily percentage gain in more than a week after Japan said it plans to encourage pension funds to increase their holdings of domestic financial assets.

Japanese Finance Minister Satsuki Katayama said the government was pursuing measures that would include encouraging the Government Pension Investment Fund, the world's largest pension fund, to make "substantially greater investments in Japanese financial assets."

The Japanese yen strengthened 0.38% against the greenback to 161.77 per dollar after reaching 161.27. However, the dollar was still up about 3% on the week against the yen.

"If you look at the scope or scale of the move, it's not that impressive — it went from, it was a one yen move, and it's retraced partially already. So it's like, all right, when are we gonna talk seriously about the matter?" said Eugene Epstein, head of trading and structured products at Moneycorp in Stamford, Connecticut.

"At this point, it's still just, it's an urging, it's not an official directive, and frankly, they could just be testing the waters ... this is a good step, so let's actually maybe put something firm here and then see how the markets react further."

BROAD-BASED YEN RALLY

The rally was broad-based, with the euro and British pound down around 0.4% each against the Japanese currency.

Before Friday's news, the yen had been holding near 40-year lows, keeping traders on watch for potential intervention by Japanese authorities.

"Macro impulses clearly are pushing towards further Yen weakening, but meaningful repatriation flows – if they occur – could be one of the most credible of several paths that lead to the Yen eroding its severe undervaluation," said Goldman Sachs analysts in a note.

The dollar was roughly unchanged on the day, with the dollar index, which measures the greenback against a basket of currencies, edging up 0.01% to 100.92. For the week, the dollar was up about 0.1%.

The euro was down 0.06% at $1.142 while sterling was little changed, up 0.01% at $1.3407 after climbing to $1.3451, its highest since June 15.

WAR CLOUDS SENTIMENT

Investors also monitored tensions in the Middle East, where a new flareup of hostilities this week between the U.S. and Iran has renewed concerns for the outlook of energy prices and global inflation, and the impact on policy for global central banks.

Daily tanker traffic in the Strait of Hormuz appeared to have slowed on Friday, with both sides still arguing over who was in control of passage through the critical waterway.

U.S. crude fell 0.55% to $71.67 a barrel and Brent fell to $76.10 per barrel, down 0.25% on the day as Iran's semi-official Tasnim news agency reported a Qatari delegation visited Iran on Friday in what is believed to be an effort by Doha to consolidate its role as a mediator.

Still, the recent escalation in hostilities put crude prices on track for a weekly gain as supply worries were exacerbated.

(Reporting by Chuck Mikolajczak; additional reporting by Rae Wee in Singapore, Harry Robertson and Sophie Kiderlin in London; Editing by Thomas Derpinghaus, Kim Coghill, Helen Popper, Sharon Singleton, Philippa Fletcher)