FOREX-Rate differentials slam yen, dollar supported

* Yen falls broadly, EUR/JPY hits 10-mth high

* Market focus on rate differentials, Fed comments boost USD

* Analysts: Euro to benefit most from rate rise speculation

(Adds comment, updates throughout)

By Naomi Tajitsu

LONDON, March 30 (Reuters) – The yen slipped to a 10-month
low versus the euro and suffered broadly on Wednesday after
recent hawkish comments from euro zone and U.S. officials
contrasted with Japan’s loose monetary policy stance.

The euro rose to around 117.30 yen, its strongest since May,
and was seen climbing higher on expectations the European
Central Bank will raise interest rates as early as next month,
with further tightening possible.

The dollar rose to around 83.15 yen, a level last seen on
March 11 when the yen initially fell after Japan’s earthquake.
Offers around that level capped further gains for the moment and
traders expected resistance at around 83.30 yen.

Hawkish comments in recent days from U.S. Federal Reserve
and European Central Bank officials contrasted with the stance
taken by the Bank of Japan, which is set to leave interest rates
near zero for some time to support the world’s third-largest
economy as it recovers from the effects of the earthquake.

Dallas Fed President Richard Fisher said on Tuesday he would
vote against further monetary easing after the Federal Reserve’s
$600 billion bond buying programme ends in June. [ID:nN2984973]

That pushed up short-dated U.S. Treasury yields, widening
their differential with Japanese ones as investors took the
comments as an indication of eventual monetary tightening.

“The yen is very sensitive to rate differentials, and with
U.S. short-end yields going up on expectations the Fed will at
some point raise rates, the dollar is rising against the yen,”
said Marcus Hettinger, global currency strategist at Credit
Suisse in Zurich.

The comments supported the dollar across the board, nudging
the euro (EUR=: Quote, Profile, Research) down 0.2 percent on the day to $1.4075 and
boosting the dollar slightly against a currency basket (.DXY: Quote, Profile, Research).

Still, Credit Suisse’s Hettinger said dollar gains may be
short-lived as an actual rate rise by the Fed is still expected
to be a long way off, while expectations the ECB will raise
rates next month and beyond would continue to support the euro.

Such anticipation has pushed the euro more than 5 percent
higher against the dollar this year, and its apparent resilience
to fiscal problems facing weak euro zone countries has earned it
the title of “Teflon euro” among some in the market.

“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.”

He added that he would be interested in the euro into the
$1.45-1.50 region, arguing that authorities were unlikely to
voice opposition to the euro at $1.50 given the outlook of
rising inflation and a pick-up in economic growth in the region.

The sovereign debt crisis was unlikely to significantly
weaken the euro in the longer term so long as it did not lead to
a break-up of the euro zone, Lequeux said, while a weak jobs
picture would keep the Fed from raising rates any time soon.

At the same time, some traders in London said fund manager
flows in the euro had been scant in recent days, while demand
was largely limited to corporates and sovereign entities.

AUSSIE SHINES

By 0943 GMT, the euro (EURJPY=R: Quote, Profile, Research) was up 0.6 percent on the
day at 117.05 yen.

The dollar (JPY=: Quote, Profile, Research) was up 0.8 percent at 83.15 yen. Traders
said the topside was littered with stop-loss orders at regular
intervals, while offers at 83.50 and 84.00 kept a lid on further
gains for now.

Still, speculation that Japanese investors may reduce dollar
hedging positions related to their overseas investments, and the
absence of huge repatriation flows following the quake are
shifting the focus back to economic fundamentals, which are
reinforcing the yen’s status as a funding currency.

The market’s focus on rate differentials benefitted
higher-yielding currencies including the Australian dollar
(AUD=D4: Quote, Profile, Research), which traded at $1.0310, near a 29-year high of
$1.0334 hit earlier in the day.

Market participants said the Aussie had more room to gain as
European investors were keen to buy the currency on any dips
given the view that a solid Australian economy meant interest
rates in the country would continue to rise.
(Editing by Susan Fenton/Ruth Pitchford)

FOREX-Rate differentials slam yen, dollar supported