Yen dips, euro holds up as Greek storm brews

By Patrick Graham

LONDON (Reuters) - The dollar inched higher against the yen on Tuesday, while the euro again proved robust in the face of reports about the prospect of Greece edging into a debt default and departure from the euro.

It has been a messy fortnight for major currency markets, with little clarity on how much credence investors really give to the prospect of Greece leaving the single currency or what impact that would have.

Looking at spot exchange rates, not much: in two months during which deadlines to seal a deal to allow the flow of more cash to Athens have been missed, the euro is up 7 percent against the dollar and 3 percent against a basket of currencies.

Many had argued that was chiefly a function of rising euro zone bond yields, but German Bund yields have fallen back 20 basis points in the past week.

The euro gained as much as a third of a percent in early European trade before settling around $1.13 and a number of dealers and strategists pointed to talk that some central banks might be buying the single currency.

"There are a lot of people scratching their heads at why the euro is not lower than it is," said Adam Myers, senior currency strategist with Credit Agricole in London. "One idea is that there is demand from central banks propping it up."

Another trader pointed to the weakening of the Swiss franc against the euro on Monday as evidence that the Swiss National Bank was buying euros again, although there has been much talk and no hard evidence of it doing so in the past couple of months.

The dollar had firmed in Asian trade as traders braced for the outcome of the U.S. Federal Reserve's two-day policy meeting on Wednesday.

The greenback briefly spiked to a session high of 123.81 yen immediately after Bank of Japan Governor Haruhiko Kuroda said he was not making any assessment on nominal yen levels or predicting its future moves in comments to parliament last week.

The dollar quickly pared its gains, and was last up less than 0.1 percent on the day at 123.43 yen.

"Markets saw 'Kuroda' in the headline and reacted, but then he didn't say anything," said Bart Wakabayashi, head of forex at State Street Global Markets in Tokyo. "Still, there have been some interesting but valid comments over the past couple of weeks, about the downside of yen weakness."

Expectations of monetary policy divergence continue to favour the dollar over the yen and the euro. The Bank of Japan remains on course to expand its monetary stimulus in October, according to a recent Reuters poll.

But a hawkish U.S. policy statement is far from a given. U.S. data overnight showed that industrial production unexpectedly fell in May.

"While we also believe that the Fed will lay the foundation for tightening, it would be remiss to not discuss the downside risks for the dollar," Kathy Lien, managing director of FX strategy for BK Asset Management, wrote in a note to clients. 

(Additional reporting by Lisa Twaronite in TOKYO; Editing by Catherine Evans)