FOREX-Rate expectations push yen to 10-mth low vs euro

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

* Market focus on rate differentials, Fed comments boost USD

* Asset managers go tentatively long of carry trades

(Adds quote, detail)

By Naomi Tajitsu

LONDON, March 30 (Reuters) – The yen slipped to a 10-month
low versus the euro and was broadly weaker 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 117.28 yen (EURJPY=R: Quote, Profile, Research), its strongest
since May 2010, and was seen climbing more on expectations the
European Central Bank will start raising interest rates as early
as next month.

A positive tone in equity markets bolstered risk appetite
and encouraged investors to seek higher-yielding assets, with
the Australian dollar rising to a 29-year high over its U.S.
counterpart (AUD=D4: Quote, Profile, Research) and a 10-month high against the yen.
(AUDJPY=R: Quote, Profile, Research)

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

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 $1.4082 and
boosting the dollar slightly against a currency basket (.DXY: Quote, Profile, Research).

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 led some
to nickname it the “Teflon euro”.

“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 said he would be interested in the euro even if it moved
towards $1.45-1.50, 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 as 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.

AUSSIE SHINES

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 and reinforcing
the yen’s status as a funding currency.

“We’re seeing asset managers and hedge funds starting to dip
their toes back into carry trades, but it’s quite tentative at
this stage,” said Geoffrey Yu, currency strategist at UBS, in an
interview with Reuters Insider.

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The market’s focus on rate differentials benefited
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.

The Aussie traded at 10-month highs of around 85.70 yen
(AUDJPY=R: Quote, Profile, Research) as a positive day for world stockmarkets encouraged
investors to hold riskier assets. (.MIWD00000PUS: Quote, Profile, Research)
(Additional reporting by Neal Armstrong, editing by Catherine
Evans)

FOREX-Rate expectations push yen to 10-mth low vs euro