FOREX-Euro hits 14-month high vs dollar, likely to extend gains

Wed Jan 30, 2013 9:38am GMT

* Euro rises vs dollar to highest since December 2011

* Single currency hits 33-month high versus yen

* Wednesday loan repayment to ECB, Fed meeting in focus

* Yen slide resumes, more losses in store

By Anooja Debnath

LONDON, Jan 30 (Reuters) - The euro rose to its highest level in 14 months against the dollar and hit a 33-month peak against the yen on Wednesday on brightening prospects for the currency bloc.

Analysts said it was likely to gain further, given expectations that U.S. fourth-quarter gross domestic product data, due later in the day, could show growth slowing.

The euro hit it highest since May 2010 against the yen on expectations of further monetary stimulus in Japan. The single currency rose to a 33-month high versus the yen of 123.53 yen, breaking past a reported option barrier at 123.00 yen.

In contrast, recent upbeat German data showed the euro zone's biggest economy may be on a path of steady recovery, while signs European banks may have turned the corner have bolstered optimism that the worst of the bloc's debt crisis has passed.

So positive is the momentum towards the euro that investors brushed aside a sharp contraction in the Spanish economy.

The euro hit a 14-month high of $1.35280, rising past an option barrier at $1.3500

"There is an increasing chance the euro could overshoot to the upside to $1.3600, maybe even seeing the $1.40 area in view," said Ian Stannard, head of European FX strategy at Morgan Stanley.

"The policy initiative in Europe to stabilise the peripheral asset markets is having quite a positive impact," he said, adding that euro strength would be most evident in the crosses, especially against the yen.

Investors, especially from Japan, have been keen to pour money into euro zone assets, pushing the euro higher.

Some strategists, however, struck a more cautious tone, warning the euro's gains could fizzle out unless there was more upbeat data from the region.

"It is a fact that things are normalising in Europe. But it is also a fact that the structural problems and issues remain unresolved and could come back to haunt the euro," Sim Moh Siong, FX strategist for Bank of Singapore, said, adding that the near-term outlook for the single currency was positive.

On Wednesday, markets will look to the first euro zone banks' repayments of three-year loans to the European Central Bank as a sign that parts of the euro zone banking system may be on the mend, and this could provide a lift to the euro.

Euro zone sentiment data due 1000 GMT is expected to show an improvement in the economy, adding to the euro-positive mood prevalent in markets, analysts said.

FEDERAL RESERVE MEETING

The euro could also get a lift from the outcome of the U.S. Federal Reserve's first policy meeting of the year. The Fed is widely expected to stick to its super-easy policy until unemployment falls sharply.

And while that is likely to push the dollar lower against most currencies, it is likely to hold its gains against the yen.

The dollar hit a fresh 2-1/2 high against the yen at 91.38 yen, bolstered by widening spreads between U.S. Treasuries and Japanese government bond yields. Traders reported an option barrier at 91.50 yen which could cap gains in the near term.

Selling the yen has been mostly a one-way bet since mid-November, based on expectations that Japanese Prime Minister Shinzo Abe would push the Bank of Japan into more aggressive monetary easing to beat deflation.

"We have a forecast of 95 yen for this quarter but even that could be exceeded given the pace of the current moves," Morgan Stanley's Stannard said.

BOJ Governor Masaaki Shirakawa, whose term ends in April, is expected to be replaced with a governor who shares Abe's views on monetary policy and who could then bring forward any easing and drag the yen even lower.