FOREX-Dollar slips versus yen after recent rally, euro eases

Mon Jan 28, 2013 11:13pm IST

* Euro pauses after reaching 11-month high
    * Yen firm but weakness to persist on prospects of easing
    * Investors look ahead to Fed meeting, U.S. GDP, jobs data


    By Wanfeng Zhou
    NEW YORK, Jan 28 (Reuters) - The dollar slid from a 2-1/2
year high against the yen on Monday as traders booked profits on
its recent rally, with the weaker yen trend likely to stay
intact on expectations of further monetary easing in Japan.
    The euro retreated from an 11-month high against the dollar
set on Friday. But analysts said the common currency looked
poised for further gains, which could lift it towards the
psychologically important $1.35 level.
    Selling the yen has been a one-way trade since mid-November
as investors believed Japan's new Prime Minister Shinzo Abe will
push the Bank of Japan into more forceful  monetary easing to
beat deflation.
    Increasing rhetoric from Japanese authorities that they are
open to the dollar rising to the 100 yen level has helped weaken
the currency further, raising eyebrows abroad and sparking talk
that it is triggering a currency war.
    "It's not a question of direction in dollar/yen, which is
higher. It's a question of the pace of the dollar/yen's climb,"
said Michael Woolfolk, senior currency strategist at BNY Mellon
in New York.
    Woolfolk expects the dollar to maintain its gains above the
90 yen level in the short term, climb to 94 by mid-year and 98
by the end of the year.
    "100 (in dollar/yen) is a foregone conclusion, but it will
be a story for 2014," he said.
    The dollar fell 0.2 percent to 90.72 yen. It had
earlier risen as high as 91.25 yen on Reuters data, hitting a
2-1/2 year high for the third consecutive session.
    The dollar had briefly recovered against the yen after data
showed U.S. durable goods orders rose more than expected in
December. But the momentum faded after the release of
disappointing U.S. pending home sales data. 
    The euro fell 0.3 percent to 122.06 yen, after
climbing to a 21-month high of 122.89 yen on Reuters data.
    Against the dollar, the euro was little changed at
$1.3461, slipping from an 11-month high of $1.3479 set on
Friday. Traders cited option expiries at $1.3400, which could
act as support in the near term.
    "After such a strong move up (in euro/dollar) it is normal
for markets, at least in the short run, to not see much
additional buying and see some profit-taking," said Ulrich
Leuchtmann, head of FX research at Commerzbank.    
    Analysts said the outlook for the euro zone improved and the
common currency looked poised for further gains, which could
lift it towards the psychologically important $1.35 level, the
highest since December 2011.
    Ahead of the $1.35 level, major resistance for the
euro/dollar includes its 2012 high of $1.3486 and the 50 percent
retracement from the high in May 2011 to the low in July 2012 at
$1.3492, traders said.
    "If we can break through $1.35, it takes us into a new
trading range," Woolfolk said. "Our view is that during the
first half of the year, the dollar will remain under pressure.
We don't expect the Federal Reserve to change its dovish tone or
its predisposition to continue expanding monetary stimulus."
    The Fed meets on Tuesday and Wednesday. The first estimate
of fourth-quarter U.S. economic growth and January payrolls
readings are also due this week.
    Data showing an improving economic outlook for Germany and a
greater-than-expected amount of loan repayment by European banks
boosted optimism the euro zone crisis has turned the corner.
    The European Central Bank is the first major central bank to
start winding back some of its unconventional monetary policy
measures. By contrast, the U.S. Federal Reserve and Bank of
Japan have open-ended pledges to buy bonds to stimulate growth.
More stimulus usually hurts a currency as it increases its
supply. 
    Data on Friday showed speculators had increased their net
long euro positions, while bets for further weakness in the
dollar hits its highest since early October. 
    In the options market, traders reported demand for euro
calls, which are bets on more gains. The one-month risk
reversals traded at 0.1 vols in favor of euro
calls, having flipped from puts towards the end of last week.
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