FOREX-Yen under pressure on rate view; Aussie hits 29-yr peak

* Yen briefly hits 10-month low vs euro; Aussie at 20-yr
peak

* Dollar hesitates before March 11 high of 83.30 yen

* Euro gains limited before Irish stress test

By Natsuko Waki

TOKYO, 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.

The dollar’s advance slowed into the Asian afternoon with
the March 11 high of 83.30 yen proving tough resistance, while
selling by Japanese banks and foreign players along with some
fiscal year-end yen demand from Japanese exporters pushing the
pair close to the 100-day moving average around 82.60.

The yen was unable to recover strongly, however, as hawkish
comments by euro zone and U.S. central bank officials reinforced
the view that the global economic recovery is on track,
bolstering risk-friendly sentiment at the end of a volatile
quarter.

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.

“Interest rate differentials are the strongest driver of the
market. The Fed is starting to communicate to the market that
QE2 is ending in June. The focus is now moving to the exit from
the strategy,” said Teppei Ino, analyst at Bank of Tokyo
Mitsubishi UFJ.

“The dollar is catching up with the euro in terms of
interest rate expectations, as euro rate hike expectations have
been largely priced in.”

The dollar rose to 83.21 yen before stepping back to
82.71. At Thursday’s high, the dollar was up 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.

However, dollar buying fizzled in the face of key resistance
at 83.30 and offers from Japanese exporters at 83.50. A break of
the 100-day moving average around 82.60 may trigger more
selling.

The euro rose as high as 117.54 yen , its highest
since May 2010, bringing its gains this year to 8 percent.

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.

The euro rose 0.2 percent to $1.4156 , facing
resistance at $1.4220 and $1.4248. BNP Paribas is recommending
buying euros from $1.4120 to target $1.45 with a stop at
$1.4020.

The Australian dollar was the main beneficiary of flows into
higher-yielders, hitting a fresh 29-year high of $1.0348
after favourable retail sales and credit growth data.

The dollar index fell a quarter percent to 75.903 .

EURO’S CHALLENGES

Wednesday’s comments from top Federal Reserve officials
added to expectations that the central bank is nearing the end
of its current round of stimulus. [ID:nN30180403]

Still, the European Central Bank is set to be the front
runner in the tightening cycle, which is helping the euro across
the board.

ECB Executive Board member Lorenzo Bini Smaghi said on
Thursday the central bank’s policy is to gradually raise
interest rates, while another board member, Juergen Stark, said
rates are exceptionally low, cementing expectations for an April
interest rate hike.

“The barrage of ECB commentary shows a central bank wanting
to keep liquidity operations separate from rate policy; the
agenda has already moved on to how hawkish Mr. (ECB President
Jean-Claude) Trichet will sound at the April 7 press
conference,” BNP Paribas said in a note to clients.

Credit Agricole said the euro may struggle to advance
further against the dollar, however, given that the euro zone
rate outlook is largely priced in.

The bank said the correlation between euro/dollar and the
three-month eurozone-U.S. interest rate spread stands at 0.95,
showing an extremely close relationship.

Investors are also nervous about the risk that the euro zone
debt crisis may spread to other peripheral countries.

Ireland will announce the results of stress tests later on
Thursday that are expected to signal the effective
nationalisation of the entire financial system. [ID:nLDE72T086]

(Additional reporting by Masayuki Kitano; Editing by Edmund
Klamann)

FOREX-Yen under pressure on rate view; Aussie hits 29-yr peak