FOREX-Widening rate gap drives yen down, Aussie at 29-yr peak

* Yen hits 10-month low vs euro, near 3-week trough vs dlr

* Yield differentials, potential hedge unwinding weigh on
yen

* Australian dollar hits 29-year high vs dollar

By Natsuko Waki

TOKYO, March 30 (Reuters) – The yen fell broadly on
Wednesday, hitting 10-month lows against the euro and touching
its lowest level in nearly three weeks versus the dollar as
interest rate differentials widened in favour of U.S. and
European currencies.

Hawkish comments by 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 March 11 earthquake.

Speculation that Japanese investors may reduce dollar
hedging positions related to their overseas investment 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.

“We’ve had comments from the Fed and a shift in sentiment
towards the U.S. policy from a rate perspective that has really
pushed U.S.-Japan yield differentials, driving the dollar
higher,” said Mitul Kotecha, head of global FX strategy at
Credit Agricole in Hong Kong.

“The fiscal year-end isn’t a story any more. The market is
coming round to the view we’re not going to see the scale of
repatriation once expected.”

The dollar rose 0.6 percent on the day to a three-week peak
of 83.02 , having breached its 50-day moving average of
82.10. The next resistance level is seen at 83.30, the March 11
high.

The move gathered pace when Dallas Fed President Richard
Fisher told Fox Business he would vote against any further
monetary easing after the current $600 billion bond buying
programme ends in June. [ID:nN2984973]

The greenback is now above an 82.00 yen high marked on March
18, when Japanese authorities and other G7 central banks worked
in concert to stop runaway yen gains. This level will now act as
support.

A Japanese brokerage trader said there is a possibility
Japanese investors could reduce their hedges if they turn
negative on the yen’s medium-term outlook, a factor that could
push the dollar towards 90-100 yen.

Some analysts also said there is a risk that Japan’s trade
deficit could shrink, reducing natural upward pressure on the
yen, as exports are likely to fall in the aftermath of the quake
and energy and resource-related imports could rise.

The dollar is up nearly 9 percent against the yen since
hitting a record low of 76.25 yen on March 17.

YIELD BACK IN FOCUS

Wednesday’s move came as the two-year U.S. Treasury yield
climbed to near six-week highs around 0.83 percent
after St. Louis Fed chief James Bullard urged the U.S. central
bank to begin reversing its campaign of monetary easing.

Bullard, who does not have a vote on Fed policy this year,
said the Fed could trim its $600 billion bond-buying programme
by $100 billion. [ID:nPRC003447]

“Non-voting, regional Fed presidents might rarely have been
so important … so long as they say what the market wants to
hear,” David Watt, a strategist at RBC, wrote in a client note.

The euro rose to 116.95 yen after breaking
through major resistance around 115.50/60, a level that has
capped the pair since May 2010.

The single currency has been driven by expectations that the
ECB, worried about inflation, may raise rates in April.

That view was supported by ECB Governing Council member
Jozef Makuch, who said on Tuesday the ECB was “highly” likely to
raise its main interest rate from the current record low level
of 1.0 percent next month. [ID:nFLATEE7LX]

ECB Executive Board member Juergen Stark was also quoted as
saying the ECB should not delay raising interest rates.
[ID:nFLATEE7LY]

Wednesday’s data is expected to show euro zone inflation
above the ECB’s target of “close to but below” 2 percent.

Three-month euro interbank lending rates rose as high as
1.219 percent , the highest since June 2009.

The euro was down a quarter percent at $1.4078 while
the dollar index rose 0.1 percent against a basket of
major currencies, although it stayed well off last week’s
15-month lows of 75.340.

Elsewhere, the Australian dollar rose to a fresh 29-year
peak of $1.0334 . It hit highs not seen since early
1982, when it was a managed currency.

Traders cited a confluence of supportive factors including
persistent talk of M&A flows, solid demand for higher-yielding
currencies and lofty commodity prices. Against the yen, it
popped above 85 for the first time since May 2010.

(Additional reporting by Ian Chua and Masayuki Kitano; Editing
by Joseph Radford)

FOREX-Widening rate gap drives yen down, Aussie at 29-yr peak