FOREX-Euro retreats from recent highs, yen weakness persists
* Euro falls on profit-taking, weak Spanish data
* Euro still favoured but marketcautious before ECB meeting
* Dollar rises to fresh 2-1/2 year high against yen
* Expectations of more easing keep pressure on yen
By Anooja Debnath
LONDON, Feb 4 (Reuters) - The euro retreated from multi-month highs against the yen and dollar on Monday as speculators took profit on the common currency's rally, with the market cautious before a European Central Bank meeting on Thursday.
Weak Spanish jobs figures and political uncertainty in Spain and Italy also drove the euro down against the dollar. Data on Monday showed unemployment in the euro zone's fourth largest economy rose 2.7 percent in January from the previous month.
Analysts, however, said this was a temporary setback for the euro and it would resume its move higher if the ECB expressed no concern about the currency's recent gains at a news conference after its interest rate decision.
"Once the ECB fails to cut rates on Thursday, which is our view, the euro will be free to move higher again, but with the uncertainty surrounding the meeting the euro will likely weaken slightly or trade sideways," said Adam Myers, senior FX strategist at Calyon.
It last traded at $1.3574, down 0.4 percent on the day, having hit a session low of $1.3580, with traders citing bids at $1.3580 and stop loss orders below $1.3570.
It rose as high as $1.3710 on Friday, a level unseen since late 2011 and up more 3 percent so far this year. Against the yen, the euro was down 0.2 percent at 126.51 yen, off a 33-month high of 126.97 yen struck last week.
Analysts said the dip in the euro would be short-lived and it was likely to head higher against the dollar and yen in coming days as interest rate differentials move in favour of the single currency.
One reason for the euro's outperformance has been the ECB's relatively upbeat view on the euro zone economy. It has been the only major central bank to withdraw some of its unconventional monetary stimulus While the Bank of Japan, the U.S. Federal Reserve are all expanding their balance sheets.
Monetary stimulus or balance sheet expansion usually hurts a currency as it increases its supply.
YEN UNDER PRESSURE
Data on Friday showed currency speculators added to bets in favour of the euro. They also increased their bets against the yen while they lowered some of their short positions against the dollar.
The dollar touched a fresh 2-1/2 year high of 93.10 yen, breaking through reported options barriers at 93.0 yen. More barriers were reported at 93.25 yen and 93.50 yen.
"The yen will remain weak, though it will likely not be sold at the momentum seen last week," said Myers, who added that investors would be looking to buy the euro and dollar against the yen on dips.
Sentiment toward the yen is negative as the BOJ is expected to remain under the most pressure among major central banks to ease policy aggressively.
"Now that Japanese policymakers set a 2 percent inflation target, they can't stop monetary easing even if the yen falls to around 100 yen per dollar because inflation will be nowhere near 2 percent in the near future," said Mitsuru Saito, chief economist at Tokai Tokyo Securities.
Analysts said Japanese portfolio managers were also looking to review their allocations after the change in monetary policy, a factor that will see more outflows from Japan and weigh on the yen.
"Traders have learned over the past three months that selling the yen is the best way to make money. They will not change that habit unless there's clear change in trend," said a trader at a Japanese bank.
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