* Sterling at lowest in 13 mths on euro, five mths vs USD
* Yen off lows on profit-taking, but downtrend firmly in place
By Wayne Cole
SYDNEY, Jan 29 - Sterling took the spotlight on Tuesday, though for all the wrong reasons, as a dour economic background and persistent rumours of a possible credit downgrade dragged the British currency to a 13-month trough on the euro and a five-month low on the dollar.
The euro extended its recent stellar run to hit 0.8575 sterling, its highest since late 2011. It has now climbed over 5 percent in just 14 sessions and is targeting former peaks at 0.8665, if not 0.8831.
The pound likewise crumbled to $1.5687, near its lowest since August, in part because of comments from incoming Bank of England Governor Mark Carney that there was still scope for monetary policy to do more in the developed world.
"The prospect of more activist monetary policy is not exactly an encouraging one for GBP, certainly not as it comes on top of a host of other negative developments - an economy that is triple-dipping, a government that is struggling to cut its deficit, and soul-searching about the UK's role within the EU," wrote analysts at JPMorgan in a note.
Cable was threatening a monthly close below the uptrend line from the Jan 2009 nadir, while the euro cleared the 61.8 percent retracement of the entire fall from 0.9083 in July 2011 to last year's low around 0.7759.
Action was modest elsewhere, with investors content to take some profits on recent major moves. That mostly took the form of trimming short yen positions, with the dollar edging off to 90.70 yen having made a fresh 2-1/2 year peak of 91.25 on Monday.
The euro inched back to 121.95 yen after topping at 122.90, which was its highest since April 2011. Bulls are targeting the 2011 peak at 123.33.
Shorting the yen has been a one-way trade since mid-November as investors wagered Japanese Prime Minister Shinzo Abe would 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 Japan is triggering a currency war.
Against the dollar, the euro pulled back a little to $1.3450, off an 11-month high of $1.3479 set on Friday. The euro has advanced for six consecutive months versus the dollar for gains of more than 9 percent.
Dealers say fund managers started the year buying everything European as tail risks for the region and the currency seemed to have declined markedly. Many investors were seriously short of European assets last year given risks a country might be forced to leave the union, or that the currency bloc could break up.
With those dangers receding, investors have been bidding for European debt and piling into long euro trade, even though much of the region is still mired in recession.
That shift echoes other big moves into equities and out of safe haven government bonds. While the S&P 500 has enjoyed its longest winning streak in eight years, yields on U.S. 10-year Treasury notes broke above 2 percent for the first time since April.
The shuffling of positions has also included selling of some Asian currencies such as the Korean won, and of commodity currencies like the Australian and New Zealand dollars.
The Canadian dollar has been particularly hard hit by dovish words from the country's central bank that put back the expected start of a tightening cycle.
News Moody's had downgraded some major Canadian banks added insult to injury and saw the U.S. dollar touch a six-month peak of C$1.0100, before edging back to C$1.0065.
There is little in the way of major data due during the Asian session on Tuesday, though India's central bank is widely expected to cut interest rates later in the day, the first easing in nine months.
Traders are also awaiting the outcome of the Federal Reserve's monetary policy meeting this week, although most do not expect any change in the U.S. central bank's dovish stance. The Fed's policy statement will be issued at the close of its two-day meeting on Wednesday.
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