September 8, 2017 / 7:29 AM / 3 months ago

FOREX-Euro nears $1.21 as divergence trades bloom

* Dollar breaks below 108 against the Japanese yen

* Euro hits fresh 2-1/2 year as Draghi fails to check FX

* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh

By Saikat Chatterjee

LONDON, Sept 8 (Reuters) - The euro rose to a fresh 2-1/2 year high on Friday as currency bulls judged the central bank’s concerns about the strengthening currency at Thursday’s policy meeting as lukewarm at best.

With the U.S. dollar breaking below some key levels overnight, particularly below 108 against the Japanese yen, investors were also keen to play the divergence outlook trade between the greenback and the euro.

“The momentum is now well and truly behind the euro and we think we are going to see the Part 2 of the euro-dollar rebound in the coming months,” said Christin Tuxen, an FX strategist at Danske Bank.

The euro was resting at $1.2062 after vaulting to $1.2092 in early trades, its highest level since January 2015. It has gained nearly 15 percent so far this year and is the best performing currency so far this year in the G10 FX space.

ECB President Mario Draghi referred several times in his post-meeting news conference to the euro’s strength, and said it was the main reason for a cut in the bank’s new 2018-19 inflation forecasts. He also indicated any winding down of its massive stimulus programme was likely to be slow.

Gavekal strategists say the euro is likely to remain on an uptrend even though there are risks of a correction because of strengthening fundamentals such as rising confidence and an improved growth trajectory.

Helping the euro were fresh signs of a breakdown in the greenback against some of its major rivals.

Risk aversion took hold as the broader markets braced for North Korea celebrating its founding on Saturday, and as powerful Hurricane Irma headed for Florida after wreaking havoc in the Caribbean.

The dollar index against a basket of six major currencies was down 0.5 percent at 91.191 after going as low as 91.011, its weakest since January 2015 and on track its biggest weekly loss in nearly 3-1/2 months.

New York Fed President William Dudley said on Thursday the U.S. central bank should continue gradually raising rates given low inflation should rebound, sounding slightly less confident than his previous hawkish comments after weak inflation readings.

With interest rates markets now pricing in only a 1 in 5 likelihood of a U.S. rate hike by the end of the year from 1 in 3 in barely two weeks, bond yields have fallen, weighing on the dollar.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Additional reporting by Shinichi Saoshiro in TOKYO; Reporting by Saikat Chatterjee; Editing by Gareth Jones)

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