FOREX-Euro heads for best month in over a year, U.S. jobs next

* Euro gains 3 pct vs dollar in January, yen loses 5 pct
* Fed keeps bond-buying stimulus in place, dollar negative
* Focus shifts to Friday's U.S. nonfarm payrolls data

By Wanfeng Zhou
NEW YORK, Jan 31 (Reuters) - The euro rose to a 14-month
high against the dollar on Thursday, heading for its best month
in more than a year, as signs of recovery in the euro zone's
economy set the currency on a bullish trend.
The yen fell, extending its recent decline on expectations
of further monetary easing in Japan. The dollar was on pace for
a monthly gain of 5.2 percent versus the yen, while the euro
rallied 8.3 percent, the best month since February 2012.
"The overall recent trends are intact. The euro probably
wants to go higher and the yen probably wants to go lower," said
Nick Bennenbroek, head of currency strategy, at Wells Fargo Bank
in New York.
Weak German retail sales data released on Thursday slightly
dented the bullish sentiment on the euro, but it was offset by a
strong reading on the country's labor market and did little to
change to the currency's rising trend.
By contrast, the U.S. Federal Reserve on Wednesday sent no
signal that its bond-buying stimulus plan may end anytime soon,
keeping the negative bias in the dollar.
Focus is shifting to U.S. nonfarm payrolls data (NFP) on
Friday, which will shed light on the health of the labor market.
The Fed said the U.S. jobs market would continue to improve at a
modest pace, and pledged to keep purchasing securities until
unemployment falls "substantially".
"We're looking at dollar weakness to persist," said Eric
Viloria, senior currency strategist at Forex.com in New York.
"The NFP number probably isn't going to change the outlook
in terms of Fed policy because even if you have a number that's
a lot better than expected, they need to see sustained
improvement in the labor market."
The euro rose as high as $1.3593 on Reuters data, its
strongest level since November 2011, and was last up 0.1 percent
at $1.3583. It was on track for a 3 percent rise this
month, the biggest since October 2011.
A huge fourth-quarter loss reported by Deutsche Bank
weighed on the euro, while traders said month-end
flows could trap it in a range and leave it below a reported
option barrier at $1.3600.
Further upside targets are at $1.3640, the high in
mid-November 2011, and $1.3833-35, the 61.8 percent retracement
of the move down from May 2011 to July 2012, which also
coincides with the July 2011 low.
Against the yen, the euro rose 0.3 percent to 123.92
, having hit as high as 124.14 yen, the strongest level
in 33 months.
The dollar climbed 0.2 percent to 91.24 yen, not far
from a high of 91.40 yen set on Wednesday, its strongest
level since June 2010. The dollar has rallied 12 percent versus
the yen since mid-November.
Traders noted reportedly large options expiries due later on
Thursday at 90.00 and 91.50 yen were likely to keep the dollar
within this week's range of 90.32 to 91.41 yen.
European politicians have ramped up talk of a "currency war"
as the euro has been the biggest beneficiary of weakness in the
yen and the dollar. But ECB policymakers have maintained a view
that the euro is well within its long-term averages, reflecting
little desire to curb its recent strength.
A Bank of Japan deputy governor shrugged off criticisms
overseas, sending the strongest signal yet that it will boldly
implement more stimulus if needed to achieve the bank's new 2
percent inflation target.
While the Fed and the Bank of Japan both signalled more
stimulus, the European Central Bank said last week that banks
would pay back a greater-than-expected amount in loans. The ECB
is the first major central bank to start unwinding some of its
unconventional monetary policy measures.
Some analysts said the euro also gained as fears of a Greek
exit and a breakup of the euro zone eased, prompting investors
to reinvest in the region after shunning it much of last year.