FOREX-Yen suffers broadly on rate differentials

* 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; previous TOKYO)

By Naomi Tajitsu

LONDON, March 30 (Reuters) – The yen plunged 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 117.05 yen, its strongest since May, and
market participants said the euro had more room to gain given
expectations the European Central Bank will raise interest rates
as early as next month, with further tightening possible.

The dollar climbed to 83.14 yen, its strongest since March
11, when the yen sold off immediately 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 Wednesday he
would vote against further monetary easing after the Federal
Reserve’s current $600 billion bond buying programme ends in
June. [ID:nN2984973]

That pushed up short-dated U.S. Treasury yields, widening
their differential with Japanese yields, as investors took the
comments as an indication the Fed may start tightening monetary
policy soon.

“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, sending
the euro (EUR=: Quote, Profile, Research) down 0.2 percent on the day to $1.4080 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.

Investors awaited speeches by more Fed officials on
Wednesday, including Kansas City Fed President Thomas Hoenig,
Richmond Fed President Jeffrey Lacker, and St. Louis Fed
President James Bullard.

“Although Hoenig and Lacker are well-known hawks, any hint
of hawkishness from Bullard (known as a centrist) may trigger a
rise in Treasury yields and the dollar,” JPMorgan analysts said
in a note.

AUSSIE SHINES

By 0750 GMT, the euro (EURJPY=R: Quote, Profile, Research) was up 0.5 percent on the
day at 117.00 yen. The latest selling in the yen was due to
system accounts being forced to dump yen against most major
currencies, traders said.

Mizuho analysts saw more upside in the euro, and recommended
buying on dips to 116.25/116.00 yen, and adding to long
positions on a sustained break above 117.00 for 119.00.

The dollar (JPY=: Quote, Profile, Research) hovered around 83.00 yen. Traders said the
topside was littered with stop-loss orders at regular intervals,
while offers at 83.50 and 84.00 also 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.

But given the view the Fed is not in a position to raise
rates anytime soon, some analysts said a further, significant
dollar/yen rise was unlikely, while yen weakness would probably
be played out on the crosses, boosting euro/yen in particular.

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 much 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.
(Additional reporting by Natsuko Waki in Tokyo; Editing by
Susan Fenton)

FOREX-Yen suffers broadly on rate differentials