* 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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