FOREX-Euro jumps on interest rate outlook; yen weakens,

* Euro jumps on expected rate hikes

* Yen down vs dollar, EUR/JPY hits 10-month high

* Market focus on rate differentials

* Asset managers go tentatively long carry trades
(Recasts, updates prices, adds detail, comment, byline)

By Steven C. Johnson

NEW YORK, March 30 (Reuters) – The euro hit a 10-week high
against the yen and rose against the dollar on Wednesday as
markets braced for higher euro zone interest rates, while the
Australian dollar hit levels last seen in the early 1980s.

The euro erased losses against the U.S. currency after a
European Central Bank policymaker said the ECB intends to raise
rates gradually, which traders said suggests next week’s
expected hike may be the first of several. [ID:nLDE72T1ZS]

The prospect of higher euro zone borrowing costs bolstered
hopes the world economy was improving and encouraged investors
to take on more risk, a trend that looks set to carry the euro
higher in coming weeks and continue to hurt the yen.

The euro in particular has shown exceptional staying power.
It is up 5 percent against the dollar in 2011 despite lingering
fiscal problems in several euro zone states, prompting some
traders to refer to it as the “Teflon euro.”

Wednesday’s remarks from the ECB’s Lorenzo Bini Smaghi
should help the currency extend those gains, as they “hint that
a series of rate hikes may be coming this year,” said Brian
Dolan, chief strategist at Forex.com.

The euro’s move above its 200-hour moving average around
$1.4125 suggests a renewed uptrend, and a break of $1.4250
would make a rally to $1.44-45 likely, Dolan said.

The euro was last up 0.1 percent at $1.4129 (EUR=: Quote, Profile, Research), well
off a $1.4049 session low. It was also trading at 117.07 yen
(EURJPY=R: Quote, Profile, Research), just below its highest level since May 2010.

“I would be confident in the euro at these levels,” said
Pierre Lequeux, head of currency management at Aviva Investors.
“I like the euro, basically, and I see some upside.”

The dollar rose to around 83.19 yen (JPY=: Quote, Profile, Research), a level last
seen on March 11, when the yen initially fell after Japan’s
earthquake. It last traded at 82.89 yen, up 0.5 percent.

Traders reported offers from 83.30-50, with orders said to
be thin until more supply placed at around 84.00.

REVIVING THE CARRY TRADE

The dollar hit a record near 76 yen this month when an
earthquake in Japan fed speculation the diaster would force
Japanese investors to bring money home from abroad.

Japanese intervention stopped runaway yen gains and rising
U.S. Treasury yields have since carried the dollar higher.
Remarks from some Federal Reserve officials about the need to
tighten U.S. monetary policy may have contributed to the rise.

Yield differentials are key to the revival of the “carry
trade,” in which investors borrow in low-yielding, low-risk
currencies such as the yen to fund more lucrative trades.

“You can see the euro/yen relationship indicating that yen
carry trade is being put back into play,” said Paul Mendelsohn,
chief investment strategist at Windham Financial Services in
Charlotte, Vermont.
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AUSSIE SHINES

Investors also snapped up the high-yielding Australian
dollar, which rose to $1.0338 (AUD=D4: Quote, Profile, Research), its highest level since
it was first floated in the early 1980s. It also hit a 10-month
high against the yen (AUDJPY=R: Quote, Profile, Research).

Scotia Capital strategist Camilla Sutton said repatriation
flows into Japan may yet materialize, which could help push the
yen higher, at least against the dollar.

Faros Trading analyst Dan Dorrow said the Aussie dollar’s
recent highs, though, are not a signal to short it, as
expectations of tighter U.S. monetary policy are overdone.

Meanwhile, he said the market is underestimating the chance
the Reserve Bank of Australia lifts rates from 4.75 percent.

“While domestic weaknesses may keep the RBA on hold for
awhile, risks are for an upside surprise,” he said. “The
potential boost to the Aussie will be augmented by global GDP
strength, firm or rising commodity prices and also central bank
reserve diversification. I am long Australian/U.S. dollar.”
(Additional reporting by Nick Olivari and Chuck Mikolajczak in
New York; Editing by Dan Grebler)

FOREX-Euro jumps on interest rate outlook; yen weakens,