* 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 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
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
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
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
"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.