By Jessica Mead and Chiara Albanese Currency markets lacked direction in relatively light trading during European hours Thursday with initial yen strength reversing to leave the Japanese currency weaker on the day, but elsewhere the dollar remained broadly lower. The yen had climbed overnight after the Nikkei stock index lurched lower in Asian trade, which forced Japanese investors to repatriate money to cover their losses. The Nikkei ended just over 5% weaker and has now wiped out all its May gains. Also contributing to the yen's early strength was data showing that Japanese investors once again sold overseas bonds. But in late morning trading, the Japanese yen weakened after a Reuters report said Japan's public pension fund is considering a change to its portfolio strategy that could allow its investment in domestic stocks to grow with a rallying market, according to people familiar with the deliberations. This is not an entirely new phenomenon; government officials have floated the idea before. But the increasingly close relationship between the Nikkei and moves in the yen amplify any moves in either market. "It's not entirely clear why that would be positive for the dollar against the yen; it may just be a function of the recent close correlation between Nikkei moves and the yen," Citigroup said in a note to clients. Broadly, the two markets are clearly intertwined. "The most important thing here is perception on the success or failure of Abenomics," said Derek Halpenny, an analyst at Bank of Tokyo-Mitsubishi UFJ in London, referring to the market shifts that have taken place since Shinzo Abe took the role of Japanese prime minister. "The Abenomics trade has been Nikkei higher, yen weaker, and now we have seen the Nikkei come off, we have the first time where people are wondering what's next. The Nikkei moves are leading yen moves, because my sense is that's where positions are bigger." With the exception of the yen, other currency pairs fluctuated in tight ranges as public holidays in some European countries, including Germany, resulted in thinner trading than usual while, in a typical pattern, some investors have reduced the scale of their bets going into the end of the month. The greenback was also weaker against other major currencies, with the euro climbing to trade briefly above the $1.30 level against the dollar and sterling rose close to $1.52. Even those currencies that have struggled in recent weeks such as the Australian dollar have remained supported against the greenback. A better-than-expected Australian quarterly capital expenditure report earlier Thursday provided support for the Australian dollar, which is now trading around $0.9660 against the dollar. Wednesday, the Aussie dollar had traded at its weakest level against the buck since early October 2011, falling to as low as $0.9528. The Australian Bureau of Statistics reported that the latest estimate for total capex in the current financial year 2012-2013 fell to A$163 billion ($156 billion) compared with an earlier peak estimate of A$180 billion. UBS said the data showed that Australia's major mining investment boom is flattening out but not collapsing. "That suggests the RBA is set to remain on hold when it meets next week on June 4," said Mansoor Mohi-uddin, chief currency strategist at UBS, which remains negative on the Australian dollar. Looking ahead, the focus is on main economic data releases in the U.S., including the latest initial jobless claims report and the second estimate of U.S first-quarter economic growth. Expectations are in line with the flash estimate of 2.5%. At 1055 GMT, the euro was trading at $1.2986 against the dollar, compared with $1.2950 late Wednesday in New York, according to trading system EBS. The dollar was at Y101.38 against the yen, compared with Y101.17, while the euro was at Y131.69 compared with Y130.92. Meanwhile, the pound was trading at $1.5153 against the dollar, compared with $1.5128 late Wednesday in New York. The Wall Street Journal Dollar Index, which tracks the dollar against a basket of currencies, was trading at 75.131, compared with 75.242 late Wednesday in New York. A summary of key levels for chart-watching technical strategists is below: Forex spot: EUR/USD USD/JPY GBP/USD USD/CHF Spot 1029 GMT 1.2980 101.40 1.5155 0.9607 3 Day Trend Bullish Bearish Bullish Bearish Weekly Trend Range Bullish Bearish Bullish 200 day ma 1.3025 90.94 1.5564 0.9389 3rd Resistance 1.3052 102.52 1.5321 0.9790 2nd Resistance 1.3030 101.85 1.5295 0.9720 1st Resistance 1.3006 101.54 1.5200 0.9640 Pivot 1.2918 101.47 1.5094 0.9669 1st Support 1.2950 100.46 1.5114 0.9560 2nd Support 1.2919 99.90 1.5070 0.9541 3rd Support 1.2898 99.48 1.5009 0.9475 Forex spot: USD Index Spot 1029 GMT 83.380 3 Day Trend Bearish Weekly Trend Bullish 200 day ma 81.518 3rd Resistance 84.054 2nd Resistance 83.745 1st Resistance 83.505 Pivot 83.820 1st Support 83.237 2nd Support 82.957 3rd Support 82.914 --Katie Martin and Dow Jones Technical Strategist Francis Bray contributed to this article. Write to Jessica Mead at jessica.mead@dowjones.com

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