* Euro falls on profit-taking, political worries, Spain data
* Euro still favoured but market cautious 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 and
caution set in before the European Central Bank meets this week.
Weak Spanish unemployment data, a lower-than-expected
improvement in the euro zone sentiment index and political
uncertainty in Italy and Spain all dragged the common currency
Spanish bond yields rose sharply on news Spain's prime
minister Mariano Rajoy was facing increasing calls to resign on
corruption charges. Polls showing Italy's former prime minister
Silvio Berlusconi regaining ground before elections later this
month added to investor concerns.
But the euro's dip was likely to prove temporary,
strategists said, and it would resume its move up if the ECB
expressed no concern about the currency's recent gains at a news
conference after its interest rate decision on Thursday.
"We have had a strong run, we are still bullish (on the
euro) over the next few weeks but this week could be a week of
consolidation. We see a bit of profit taking ahead of the ECB
meeting," said Kiran Kowshik, currency strategist at BNP
"There is also a little bit of uncertainty around Italian
and Spanish politics, weighing on the euro."
The euro traded at $1.3560, down 0.6 percent on the
day, having hit a session low of $1.3556, as some speculators
trimmed recent bets in favour of the euro. It fell past stop
loss orders below $1.3570 with more stops cited below $1.3550.
The euro had risen to $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 0.6 percent at 125.98 yen
, off a 33-month high of 126.97 yen struck last week.
Analysts said the euro would be bought at lower levels
against the dollar and yen in coming days as interest rate
differentials move in favour of the shared 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.
"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 Credit Agricole.
Data last Friday showed currency speculators added to bets
in favour of the euro in the week ended Jan. 29. 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 93.185
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 towards the yen is negative as the BOJ is expected
to remain under pressure to ease policy aggressively.
Analysts said Japanese portfolio managers were also looking
to review their allocations after the change in monetary policy,
and that could prompt more outflows from Japan and weigh on the
"A reduction in the high level of JGB (Japanese Government
Bonds) exposure traditionally held by Japanese funds will have
both short-term and long-term negative effects on the yen, in
our view," analysts at Morgan Stanley said in a note.
"We maintain our dollar/yen long position."