RPT-FOREX-Euro pauses after rally, yen breaks fall vs dollar

Mon Jan 28, 2013 6:17pm IST

* Euro slips from 11-month peak vs dollar on profit taking
    * Morgan Stanley recommends investors to buy euro vs Aussie
    * Yen firm but weakness to persist on prospects of easing


    By Anooja Debnath
    LONDON, Jan 28 (Reuters) - The euro eased from an 11-month
high against the dollar on Monday as investors took profits on
its recent rally, although many were seeking to buy it back at
lower levels on growing optimism about a euro zone recovery.
    The euro was down 0.2 percent on the day against the
dollar at $1.3435, slipping from the 11-month high of $1.3480
hit last Friday. Traders cited option expiries at $1.3400 which
could act as support in the near term.
    While sentiment towards the euro has picked up, it will face
a series of major resistance levels before $1.35, including its
2012 high of $1.34869 and the 50 percent retracement from the
high in May 2011 to the low in July 2012 at $1.3492.
    "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.
   "There is still some room for euro to go higher, but the road
upwards will be characterised by bumps, pauses and even by
corrections."
    The euro rallied on Friday after data showed European banks
plan to repay more than expected of the loans they borrowed from
the European Central Bank during the debt crisis, indicating
growing confidence. 
    German data also provided evidence that Europe's largest
economy is gathering pace after contracting late last year.
    The European Central Bank is the first major central bank to
start winding back some of its unconventional monetary policy
measures, unlike the U.S. Federal Reserve and Bank of Japan,
which are buying bonds open-endedly to stimulate growth. More
stimulus usually weighs down on a currency as it increases its
supply. 
    Positioning data on Friday showed speculators had increased
their net long euro positions, while bets for further weakness
in dollar rose to its highest since the week of Oct. 2. 
    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 favour of euro
calls, having flipped from puts towards the end of last week.
    The euro was particularly strong on the crosses having
touched a fresh 8-month high against the Australian dollar
 of A$1.2950 and a 13-1/2-month high against the
British pound of 85.56 pence on Monday.
    Morgan Stanley in a note recommended investors buy the euro
against the Australian dollar, targeting it to rise to A$1.3400,
with a stop loss at A$1.2600, as more investors, especially
those in Japan, look to buy European assets.  
    The euro rose to a 21-month high of 122.91 yen,
but slipped to trade down 0.3 percent on the day at 122.02 yen.
    
    YEN WEAKNESS
    The dollar also eased against the yen, but traders and
strategists said the yen was likely to weaken again on the view
that Japan's government will keep up its push for aggressive
monetary easing.
    The dollar was down 0.1 percent against the yen at 90.81 yen
, with traders citing bids at 90.50 yen which could act as
support. The dollar climbed as far as 91.25 yen, its
highest level since June 2010, before retreating.
    "The rally in dollar/yen is driven more by speculative
positioning rather than fundamental change," said Adam Cole,
global head of FX strategy at RBC. "At some point markets will
demand action rather than words but it is too soon to position
for that."
    Increasing rhetoric from Japanese authorities that they are
open to the dollar rising to the 95 yen level has helped weaken
the currency further, raising eyebrows abroad and sparking talk
that it is triggering a currency war. 
    The yen's weakness also stemmed from a rise in U.S. bond
yields, with which the currency has a close inverse correlation.
The 10-year U.S. bond yield shot up on Friday,
helped by optimism on the global economy.
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