December 31, 2013 / 1:12 PM / 4 years ago

FOREX-Euro set to be 2013's top-performing major currency

* Euro slips but still up versus dollar for 2013

* Euro helped by AQR; strength baffles hedge funds

* Dollar set for best gain vs yen in 34 years

By Laurence Fletcher

LONDON, Dec 31 (Reuters) - The euro eased back on Tuesday but was still on track to be the world's best-performing major currency this year, while the dollar was set for its biggest annual gain against the yen since 1979.

The single currency has gained 26 percent against the yen this year, though it fell 0.4 percent to 144.60 yen on Tuesday, having set a five-year high of 145.67 yen on Friday.

Against the dollar the euro has gained more than 4 percent, baffling many hedge funds who had expected a weak euro zone economy and a reduction in Federal Reserve bond-buying to strengthen the greenback this year.

The Fed, however, finally announced its first move earlier this month and a steady reduction in the flood of dollars it is pumping into the economy looks set to contrast starkly with the Bank of Japan next year.

"We think things are going to be very data-dependent," said Paul Chappell, CIO of UK-based hedge fund manager C-View.

"At the moment that looks like U.S. numbers are going to be relatively robust compared with some other G7 peers, so the dollar is likely to be relatively robust versus other developed country currencies."

He said the euro, boosted recently by banks in the region repatriating funds to shore up their capital bases, tends to lose ground in the first few days of a new year.

On Tuesday the euro was 0.2 percent down at $1.3775 as the gap between U.S. two-year government bond yields and German yields widened, increasing the relative attractiveness of the dollar.

The dollar slipped 0.2 percent to 104.96 yen, but was up 21 percent for 2013, its biggest annual gain since a 23.7 percent rise in 1979, according to Thomson Reuters data.

Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore, saw the dollar rising to 110 yen in the first half of 2013, before retreating below 100 yen mid-year and then re-testing 110 yen in late 2014.

The Swiss franc hovered near a three-decade peak against the yen, fetching 117.90 yen. The franc touched 119.17 yen on Friday, its highest since January 1983.

C-View's Chappell added: "We're very much into year-end where individual currencies are flopping around a bit, predicated on year-end flows."

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