Foreign exchange markets look calmer following yesterday's sharp appreciation of the yen and equally strong fall in the euro. The dollar yesterday gained 1% versus the euro and lost about the same against the yen.

The focus of action yesterday was the euro/yen cross rate, which shows the net movement between those two currencies. This indicator fell by nearly 3% to 97.60. Today, it is still soft at 98.05.

Two factors are seen as underpinning these sharp adjustments. First, the euro has struggled to move higher in recent days despite good economic data and is now subject to some profit taking. The market also has become more and more convinced that Japanese interest rates are likely to rise in the near future and is therefore interested in going back into long yen positions.

This morning, the euro is slightly above last night's closing levels at $0.9420.

Sally Wilkinson at

Daiwa SBCM Europe

does not read a lot into the euro's pullback. "It came quite a long way, quite quickly, and people are just waiting to see where it will go from here," she said.

Dollar/yen is again opening lower from yesterday's close at 104.00. The market seems to have put to the side concerns over the outcome of the Japanese elections on Sunday.

The Japanese Vice Minister for Financial Affairs,

Haruhiko Kuroda

, said today that Japan would intervene in currency markets to prevent an excessive rise in the yen. "Looking at the economies of the United States, Japan and Europe, there is no reason for the yen's strength," he said.

"Right now the yen is being driven by thoughts of the

BOJ.

All the talk from the BOJ has been about an early tightening," Wilkinson said. She does not expect the Bank of Japan to tighten policy in July, but she does expect the yen to remain firm. "We are still expecting some general strengthening of the yen," she said.

Wilkinson anticipates the next quarterly "tanken" report by the Bank of Japan, which indicates how businesses in the country are doing, will be well received and will underpin the yen's gains. It comes out July 4.

The pound is continuing to fluctuate in a narrow range outside of the main market activity. Sterling is opening a little lower at $1.5025. The euro/sterling cross is firmer as the euro ticks higher and is opening at 62.70 pence.

Dollar/Swiss franc has also made a substantial move on the back of the dollar's strength yesterday and is still firm at 1.6485. The euro/Swiss franc cross is firmer at 1.5525.

U.S. dollar/Canada remains in an indecisive range and is opening little changed at C$1.4770.

The Australian dollar is giving ground at $0.5960.

The New Zealand dollar is also down slightly at $0.4700.

The South African rand moved higher to 6.90.

The Mexican peso weakened to 9.94 per dollar as concerns over weekend elections dominate traders' views.

The Polish zloty is weaker at 4.43 per dollar affected by the softness in the euro.