FOREX-Euro gets the hugs, as dollar & yen stay unloved

Thu Jan 31, 2013 5:11am IST

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* Euro best performer among G3 currencies

* Fed keeps bond-buying stimulus in place

* Yen remains under pressure, delves new depths

By Ian Chua

SYDNEY, Jan 31 (Reuters) - The euro held near a 14-month peak against the dollar and a 2-1/2 year high versus the yen on Thursday, having risen solidly as investors expect central banks in both the United States and Japan to keep an aggressive easing stance.

The U.S. Federal Reserve underscored that view by leaving in place its monthly $85 billion bond-buying stimulus plan on Wednesday, arguing the support was needed to lower unemployment.

"The bottom line is that there are no signs of a shift away from QE3," said Vassili Serebriakov, strategist at BNP Paribas referring to the Fed's bond-buying programme.

"Moreover, recent data suggest that the economy remains well short of the substantial and sustained improvement that the Fed is looking for."

That saw the euro break above key resistance around $1.3500 and move close to $1.3570, a high not seen since November, 2011. As a result, the dollar index fell to a six-week low around 79.183. It was last at 79.263.

"The DXY is threatening support at 79.2. From a technical perspective, a clear break of that level would open further USD downside," Serebriakov added.

Seeming to support the Fed's cautious view, data on Wednesday showed the U.S. economy unexpectedly contracted in the fourth quarter.

Still, a lot of that weakness came from a plunge in defence spending, suggesting the underlying fundamentals were not as bad as the headline figures indicated.

Traders said the market focus will now turn to the U.S. employment report on Friday for the latest read on the health of the world's biggest economy.

In contrast, European data on Wednesday showed economic sentiment improved for a third straight month, a sign the euro zone is emerging from a low point and diminishing the chance of a rate cut from the European Central Bank.

Against the yen, the single currency was up at 123.58 , having hit a 2-1/2 year high of 123.86.

Expectations that newly installed Japanese Prime Minister Shinzo Abe would push the Bank of Japan into more aggressive monetary easing to beat deflation have made selling the yen a one-way bet in the past few weeks.

Since November, the euro and dollar have climbed around 23 percent and 15 percent on the yen respectively.

Abe on Wednesday shrugged off criticism that the government was trying to intentionally weaken the yen with its monetary and fiscal stimulus measures, saying they were aimed at beating deflation and achieving sustainable economic growth.

Even the dollar advanced against the yen, climbing to a fresh 2-1/2 year high around 91.40 yen. It last stood at 91.14. Traders noted large option barriers around 91.50-92.00 were likely to cap further upside for now.

"Yen depreciation has more room to go, in our view. We now look for the yen to depreciate to 96 and 100 versus the USD in 6 months and 12 months, respectively," analysts at Barclays Capital wrote in a client note.

Commodity currencies were mostly relegated to the sidelines, although a warning about rising inflation pressures from New Zealand's central bank gave the kiwi dollar a bit of a fillip.

The kiwi jumped to $0.8363 from a low of $0.8295, but remained stuck in its $0.8200/8450 range.

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