(Reuters) - The yen rose on Thursday as worries that Washington was showing no signs of progress in reaching an agreement to raise the U.S. debt ceiling hit risk sentiment and triggered demand for perceived safe-haven currencies.
The Japanese currency was the main beneficiary of poor risk appetite after news reports quoted Japanese Economics Minister Kaoru Yosano as saying currency intervention to stem further yen strength would be quite difficult.
Yosano also said the focus for Japanese policymakers would be the August 2 deadline to raise the U.S. debt ceiling.
Market players have been speculating that the Bank of Japan may intervene to curb yen strength but Yosano's comments suggested there would be no central bank action before the August2 deadline on the U.S. debt ceiling, opening the door to further yen gains.
The dollar fell 0.3 percent to 77.71 yen, hovering near a four-month low of 77.57 yen hit on Wednesday on trading platform EBS. That was not far from a record low of 76.25 yen struck in March, which triggered a co-ordinated intervention in the market to stem the yen's strength.
The euro fell 0.2 percent to 111.78 yen and was last up slightly against the dollar at $1.4390, below a high of $1.4536 hit on Wednesday when concerns over the U.S. debt impasse mounted.
"Euro and dollar are the two ugly currencies and nobody really knows what to do with them. So if you want to go defensive you buy the yen," said David Bloom, global head of FX research at HSBC.
"At the moment it's all about the U.S. debt ceiling. But if you ask which of these debt crises you would prefer, the answer is neither."
U.S. policymakers have so far failed to make progress in agreeing a deal to raise the nation's debt ceiling before the deadline, unnerving investors who worry the world's largest economy could default on its debt.
The dollar is likely to enjoy a short-covering rally if the debt ceiling is raised in time to avert a default, but such a bounce could prove short-lived, said Sacha Tihanyi, senior currency strategist for Scotia Capital in Hong Kong.
"It is unlikely that the long-term fiscal structure will be changed enough to completely remove the risk of a downgrade," Tihanyi said. "The dollar short covering would only be in the immediate vicinity of an agreement, after which I'd expect the bearish ... fundamental picture to re-establish itself."
The dollar edged higher against the safe-haven Swiss franc to 0.8015 francs but remained within sight of a record low of 0.7996 hit this week.
The New Zealand dollar rose 0.4 percent to U.S.$0.8740 after the Reserve Bank of New Zealand flagged a rate hike as early as September, nearing a 30-year peak of $0.8766 hit on Wednesday.
AUCTION FOCUS
The euro looked vulnerable ahead of an Italian government bond auction at around 0900 GMT which will be used to assess the severity of contagion in the euro zone debt crisis.
Italian government bond yields climbed to 5.85 percent on Thursday, highlighting the fragility of last week's euro zone deal on a second rescue package for Greece.
"If Italian 10-year government bond yields break above their previous peak and keep rising after climbing above 6 percent, that would be a cause for significant concern," said Junya Tanase, chief FX strategist for JPMorgan Chase Bank in Tokyo.
Meanwhile, contrasting recent statements from euro zone politicians on common European bonds, underlining divisions within the currency union, and a downgrade of Greek debt by ratings agency Standard & Poor's on Wednesday also weighed on the euro.
However, the single currency has support against the dollar at its 100-day moving average near $1.4328, its 55-day moving average around $1.4311, and its July 14 intraday high of $1.4282.
A euro zone economic sentiment indicator, due at 0900 GMT, will also be in focus. It is forecast to fall to 104.0 from 105.1 in June..
(Additional reporting by Masayuki Kitano and Antoni Slodkowski; Editing by Susan Fenton)
