FOREX-Yen depressed near lows ahead of BOJ, ECB rates verdict
* Yen near recent lows ahead of BOJ, ECB meetings
* Portugal's aid request unlikely to change ECB rate hike view
* Yen faces long-term slide but correction risks imminent
By Natsuko Waki
TOKYO, April 7 (Reuters) - The yen held near a six-month low against the dollar on Thursday and an 11-month trough versus the euro ahead of monetary policy meetings in Japan and the euro zone that are expected to reinforce widening interest rate differentials.
The euro held near the previous day's 14-month peak against the dollar ahead of an expected euro zone interest rate hike, with more tightening signals anticipated from the European Central Bank seen offsetting concerns about the euro zone debt after Portugal's request for European financial aid.
The Bank of Japan is expected to keep monetary policy on hold but signal its readiness to ease policy further, bucking a global trend of central banks withdrawing excess liquidity put in place during the financial crisis.
Interest rate differentials have become the major driver in currency markets, reviving interest in carry trades, which involve selling the low-yielding yen to make overseas investments that bring higher returns.
Many believe this trade may be running out of steam in the near term, however, with Thursday's monetary policy meetings by the BOJ and ECB possibly a catalyst for correction.
"The yen has been falling on expectations of diverging monetary policies between Japan, the United States and the euro zone. The market ignored Portugal's request for aid because it was seen unlikely to stop the ECB from raising interest rates," said Teppei Ino, an analyst at bank of Tokyo-Mitsubishi UFJ.
"Japan's trade surplus is expected to shrink, which could scale down fundamental upward pressure on the currency. But in the near term, a lot of moves have been driven by speculative flows and it may have moved too fast and now may be the time for the market to cool down."
The dollar stood at 85.47 yen , having risen as high as 85.54 earlier, almost 10 yen above its record low of 76.25 yen hit in March, days after Japan's earthquake.
"Fears that Japanese manufacturing will be 'hollowed out' by a stronger currency, the risk of further monetary easing by the Bank of Japan, a lack of compelling investment options at home for Japanese investors and the desire by local households to earn higher returns abroad should all weigh on the yen in 2011 and 2012," UBS said in a note to clients.
UBS raised its long-term dollar/yen forecast to 90 yen by the end of 2011 from 85, and 100 yen by the end of 2012 from 90.
In the near term however, resistance around the November high of 85.94 yen is hindering the dollar's further advance. The area around 85.40 to 85.95 includes a 50 percent retracement of the decline from the May peak, as well as a downtrend line from the 2007 cycle high.
The euro rose as high as 122.55 yen , just ticks away from the previous day's 11-month peak.
The yield spread between two-year euro zone and Japanese government bonds rose to 164.6 basis points, its highest since December 2008.
The single European currency stood at $1.4328 , having risen to $1.4350, its highest since late January 2010, on Wednesday.
The ECB is set to raise its benchmark rate by 25 basis points for the first time since July 2008. Many analysts say ECB President Jean-Claude Trichet must sound hawkish enough to keep alive expectations for around 100 basis points of rate hikes expected by November and for the euro to enjoy fresh gains.
Another concern for the euro is the region's persistent debt crisis. Portugal became the third euro zone member to seek a bailout from the European Union, with the size of the package expected to be around 60-80 billion euros ($85-114 billion).[ID:nLDE7350HL]
Higher euro zone interest rates would be likely to make it difficult for debt-laden peripheral countries by raising their already high borrowing costs.
On the other hand, higher oil prices are expected to support the euro as oil-rich countries convert part of their dollar revenues into the single currency for diversification. Brent crude oil prices rose to a 2-1/2 year high above $123 a barrel on Wednesday LCOc1.
The expectation for higher euro zone rates contrasted with uncertainty in the United States over when the Federal Reserve may begin to tighten policy. The U.S. economy remains too fragile for the Fed to begin raising rates, Atlanta Fed President Dennis Lockhart said on Wednesday [ID:nN06207079].
The dollar was steady at 75.563 against a basket of currencies. ($1 = 0.703 Euros) (Editing by Michael Watson)
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