FOREX-Yen hits 10-mth low vs euro; more falls likely

* Yen falls to 10-month low versus euro at 117.54 (EURJPY=R: Quote, Profile, Research)

* Carry trade revival keeps yen under broad selling pressure

* Euro firms versus dollar; Irish bank stress tests due

* Quarter-end, fiscal year-end flows to make trade volatile

(Changes dateline, adds quotes, detail, previous TOKYO)

By Neal Armstrong

LONDON, March 31 (Reuters) – The yen hit a fresh 10-month
low versus the euro on Thursday and touched a three-week trough
against the dollar as expectations mounted that Japan would lag
the euro zone and U.S. central banks in raising interest rates.

Traders said significant quarter-end and fiscal year-end
flows were likely to make trade in the major currency pairs
volatile on the day.

European Central Bank Executive Board member Lorenzo Bini
Smaghi on Wednesday implied that the central bank’s policy is to
gradually raise interest rates, with markets expecting the
tightening cycle to begin in April. [ID:nLDE72T1ZS]

Two U.S. Federal Reserve Bank officials on Wednesday said
the Fed needs to exit its unprecedented monetary stimulus,
suggesting the debate over future policy is heating up as the
U.S. central bank nears the end of its current round of
stimulus. [ID:nN30180403]

Anticipation that Japan would buck the global tightening
cycle and leave interest rates low to support its quake-hit
economy is encouraging players to sell the yen to fund
higher-yielding investments, in a revival of the carry trade
that flourished before the credit crisis began in 2007.

“Rate differentials are playing a big role, especially as
there is no probability for the BOJ to become more hawkish, even
in the medium- to long-term.” said Manuel Oliveri, currency
strategist at UBS in Zurich.

“There is scope for rate expectations to stay supported in
the euro zone. German demand and the service sector is strong so
price rises are likely to become domestically driven, not just
commodity driven,”

Euro zone flash inflation data for March is due for release
at 0900 GMT, with economists in a Reuters poll forecasting a 2.3
percent rise in prices on the month.

The euro rose to 117.54 yen in Asian trade, its highest
since May 2010, up around 0.4 percent on the day. (EURJPY=R: Quote, Profile, Research)

“I see little resistance until 119.90, which was a pivotal
area back in May 2010,” said a London-based spot trader.

The dollar rose to a three-week high of 83.21 yen (JPY: Quote, Profile, Research)
before running into selling by Japanese banks and foreign
players along with some fiscal year-end yen demand from Japanese
exporters. Strong offers were seen from 83.30 to 83.50, with
more around 84.00.

The dollar was up around 9 percent from its record low of
76.25 yen set on March 17 before G7 central banks intervened in
a rare coordinated move to stem the yen’s rise. It was last at
82.85, unchanged on the day.

Jefferies analyst Naomi Fink said the start of the new
fiscal year could bring more yen selling although it was
unlikely to fall in a straight line.

“I see a trend of greater tolerance. Households and
companies have a lot of cash and they will need to invest in
overseas ventures. Overseas investments in the new financial
year should weaken the yen a bit more,” she said.

STRESS TESTS

The euro rose 0.4 percent to $1.4180 (EUR=: Quote, Profile, Research), still within
its March range, with traders saying a break of option barriers
at $1.4250 would be needed for fresh upside momentum.

BNP Paribas is recommending buying euros from $1.4120 to
target $1.45 with a stop at $1.4020.

Ireland later on Thursday announces the results of stress
tests that are expected to signal the effective nationalisation
of the entire financial system.

Tests are expected to reveal an additional 20-25 billion
euro hole in Irish banks’ capital and will be followed by a
radical restructuring of the sector, the Irish Independent
newspaper reported. [ID:nLDE72U0H9]

“Ireland is not a big risk to the euro as there is no
systemic risk thanks to the euro zone rescue fund. Confidence is
being driven by the larger euro zone countries,” said Oliveri at
UBS.

The Australian dollar hit a fresh 29-year high of $1.0348
(AUD=D4: Quote, Profile, Research) after favourable retail sales and credit growth data.

The dollar index fell around 0.3 percent to 75.849 (.DXY: Quote, Profile, Research).

(Additional reporting by Natsuko Waki, editing by Stephen
Nisbet)

FOREX-Yen hits 10-mth low vs euro; more falls likely