FOREX-Euro slips from recent peaks before ECB, yen off lows

* Euro off recent peaks before ECB rate decision

* Portugal’s aid request unlikely to change ECB rate hike
view

* Yen faces long-term slide but correction risks imminent

By Natsuko Waki

TOKYO, April 7 (Reuters) – The euro slipped from an 11-month
high against the yen and 14-month peak versus the dollar as
investors focused on how much room the European Central Bank has
for raising interest rates beyond a widely expected tightening
later in the day.

The yen held above a six-month trough against the dollar.
The Bank of Japan met market expectations that it would keep
monetary policy steady and signal its readiness to ease policy
further, bucking a global trend of central banks withdrawing
excess liquidity put in place during the financial crisis
[ID:nL3E7F70JG].

The ECB is set to raise its benchmark rate by 25 basis
points for the first time since July 2008. Portugal’s request
for a European bailout has not changed the view the ECB would
follow up with more interest rate hikes, but many believe the
euro has risen too fast too far and is overdue a correction.

Analysts also say ECB President Jean-Claude Trichet must
sound hawkish enough to keep alive expectations for around 100
basis points in rate hikes by November and for the euro to
achieve fresh gains.

“The euro has rallied considerably on the ECB rate hike view
but it may be the case of buy the rumour sell on the fact,” said
Koji Fukaya, chief FX strategist at Credit Suisse.

“The euro zone debt crisis has not stopped the ECB from
making hawkish comments. That means Portugal’s story is not
going to stop a rate hike. The market is pricing in 100 bps of
rate hikes, but it may be difficult for us to really see that.”

The euro was down a quarter point on the day at $1.4297
, having risen to $1.4350, its highest since late January
2010, on Wednesday.

Near-term support is seen in the $1.4285-1.4250 area.
Failure to rise strongly above $1.4282 could open the way for a
move back to around $1.4160.

The dollar had risen as high as 85.54 , almost 10 yen
above its record low of 76.25 yen hit in March, days after
northeast Japan’s devastating earthquake. By mid-afternoon it
had slipped to 85.17.

Resistance around the November high of 85.94 yen is
hindering the dollar’s advance. The area around 85.40 to 85.95
includes a 50 percent retracement of the decline from the May
peak, as well as a downtrend line from the 2007 cycle high.

The euro was down two thirds of a percent at 121.77 yen
after hitting an 11-month peak on Wednesday.

Despite Thursday’s rise, the yen is expected to face
long-term downward pressure from low interest rates and an
expected decline in Japan’s trade surplus as the country imports
to rebuild the quake-hit region.

“Japan’s trade surplus is expected to shrink, which could
scale down fundamental upward pressure on the currency. But in
the near term, a lot of moves have been driven by speculative
flows and it may have moved too fast and now may be the time for
the market to cool down,” said Teppei Ino, an analyst at bank of
Tokyo-Mitsubishi UFJ.

The yield spread between two-year euro zone and Japanese
government bonds rose to 164.6 basis
points, its highest since December 2008.

RHETORIC

The euro zone debt crisis has had little influence on the
ECB’s rhetoric. But higher euro zone interest rates would
likely make it difficult for debt-laden peripheral countries to
finance their deficits, by raising already high borrowing costs.

Portugal became the third euro zone member to seek a bailout
from the European Union, with the size of the package expected
to be up to 80 billion euro ($114 billion). [ID:nLDE7350HL]

Beyond the near-term, higher oil prices are expected to
support the euro as resource-rich countries convert part of
their dollar revenues into the single currency to diversify.

Brent crude oil prices stood near the previous day’s 2-1/2
year high near $123 a barrel (LCOc1: Quote, Profile, Research), while the
Reuters-Jefferies CRB index , a global commodities
benchmark, hit a one-month peak on Wednesday.

In Asia, where central banks are stepping up intervention,
euro demand from authorities which are also diversifying their
reserves is likely to offer the single currency a solid floor.

The expectation for higher euro zone rates contrasted with
uncertainty in the United States over when the Federal Reserve
may begin to tighten policy. The U.S. economy remains too
fragile for the Fed to begin raising rates, Atlanta Fed
President Dennis Lockhart said on Wednesday [ID:nN06207079].

The dollar was up 0.1 percent at 75.613 against a
basket of currencies.

The Australian dollar scaled a fresh 29-year peak against
the greenback of $1.0481 and rose to 89.45 yen
, its highest since September 2008, after data showed
the economy added a higher-than-expected 37,800 jobs in March.
[ID:nSYU010876]
($1 = 0.703 Euros)

(Additional reporting by Masayuki Kitano and Reuters FX analyst
Krishna Kumar; Editing by Joseph Radford)

FOREX-Euro slips from recent peaks before ECB, yen off lows