Euro extends gains; yen broadly weaker

By Ian Chua

SYDNEY (Reuters) – The euro hit fresh 11-month highs against a broadly weaker yen early in Asia on Monday and held firm against the dollar with markets all but certain the European Central Bank will raise interest rates this week.

In contrast, the Bank of Japan is likely to downgrade its economic assessment at its meeting on Wednesday and may consider finding more ways to help the economy recover from last month’s massive earthquake and devastating tsunami.

This is likely to weigh on the Japanese currency, which is already under pressure following a rare coordinated G7 intervention to temper runaway yen gains on March 18.

The euro briefly popped above 120 yen for the first time since May 2010 and last traded at 119.78. The dollar stood firm at 84.15 yen, having risen to six-month highs around 84.72 Friday.

“However, we think the further rise of USD will be limited or even reversed as recent market expectation over the early end of U.S. QE2 and the start of rate hiking within this year looks overdone,” analysts at Barclays Capital wrote in a report.

Indeed, one of the Federal Reserve’s most powerful policy makers on Friday pushed back against an increasingly hawkish tone from some other Fed officials worried about inflation, saying he saw no need for the central bank to reverse course.

William Dudley, president of the New York Federal Reserve Bank, said the Fed was “still very far away” from achieving its mandate of maximum sustainable employment and price stability, even though the economy is on a firmer footing.

“He did not disappoint, other than those hoping that he would change his tune, and those scrambling on the USD bandwagon,” said David Watt, strategist at RBC.

Dudley’s comments saw the dollar index (.DXY: Quote, Profile, Research), which tracks its performance against a basket of major currencies, fall below 76.000 from highs of 76.610 on Friday. The index was last at 75.820, within reach of 16-month lows of 75.340 plumbed on March 31.

While this means further gains in dollar/yen are likely to be difficult, weakness in the yen will most likely continue to be expressed on the crosses, particularly against higher yielding currencies like the Australian dollar, traders said.

The Australian dollar has reached highs not seen since early May 2010 at 87.69 yen, and was last at 87.49. It has gained more than 12 yen since March 17.

The Aussie also hit a fresh 29-year high against the greenback, reaching $1.0422 after breaching a barrier at $1.04, which triggered stop-loss buying early in the session.

Traders have cited healthy retail Japanese demand for the higher-yielding Aussie as a positive factor. Australia offers some of the most attractive yields in the developed world with the official cash rate standing at 4.75 percent.

The Reserve Bank of Australia led major central banks by hiking 175 basis points since October 2009 and it is widely expected to keep rates unchanged at its policy-setting meeting on Tuesday with inflation well contained.

The U.S. dollar failed to get a sustained lift from data showing U.S. employment grew firmly for a second straight month in March, leading to a fall in the jobless rate to a two-year low of 8.8 percent.

The euro traded at $1.4235, having risen to $1.4245 on Friday. A break of $1.4249 would take it to November highs, paving the way for a retest of the January peaks above $1.4281.

(Editing by Wayne Cole)

Euro extends gains; yen broadly weaker