FOREX-Yen plunges as BoJ leans to easing, euro rises on Spain

Mon Oct 22, 2012 2:45pm EDT

Related Topics

* Bank of Japan inclined toward easing again, sources say

* Euro climbs after Spain's regional election results

* Uncertainty over when Spain will request bailout caps gains

* Yen drops vs dollar, euro on BoJ easing expectations

By Julie Haviv

NEW YORK, Oct 22 (Reuters) - The yen plummeted to multi-month lows versus the dollar and euro on Monday on heightened expectations that the Bank of Japan will ease monetary policy at a meeting next week.

The Bank of Japan is leaning toward easing again, according to sources familiar with its thinking, with policymakers discussing additional steps that could come together with a further increase in its asset buying scheme.

The central bank has been under renewed pressure to expand monetary stimulus at its Oct. 30 rate review when it is expected to cut its growth forecasts and push back the timing of hitting its 1 percent inflation target.

Dismal data on Japan's exports, which tumbled in September, added to expectations of more policy stimulus from the Bank of Japan.

The euro hit a high of 104.45 yen, its highest since early May. It last traded at 104.14, up 0.7 percent on the day.

The dollar hit a peak of 79.87 yen, its highest since July 12, gaining momentum after breaching resistance at its 200-day moving average around 76.42 yen. It last traded at 79.78, up 0.6 percent on the day, according to Reuters data.

Strategists said the yen could rebound strongly next week if the Bank of Japan disappoints expectations and keeps policy on hold. Societe Generale analyst Sebastien Galy recommended paring long dollar/yen positions and maintaining a strategy of buying the dollar on dips.

Jens Nordvig, global head of foreign-exchange strategy at Nomura Securities in New York, said they remain long dollar/yen in the spot market from 78.80, and are looking for ways to establish additional exposure to the upside in leveraged form.

EURO GAINS ON SPAIN

The euro, meanwhile, rallied against the dollar and yen as regional elections in Spain over the weekend removed a potential obstacle for the country's prime minister to request a bailout.

The euro, up about 1.6 percent against the dollar so far in October, gained support from comments by European Central Bank policymaker Joerg Asmussen, who reiterated that the bank's commitment to do everything in its power to show the euro is irreversible.

Spanish Prime Minister Mariano Rajoy's People's Party secured victory in his home region of Galicia, boosting his austerity drive.

"In short, the strong showing in Galicia indicates that Rajoy may now have the political capital to make a formal appeal for a bailout, which would be viewed positively by the market," said Boris Schlossberg, managing director of FX strategy at BK Asset Management, in New York.

Rajoy, however, faces another test on Nov. 25 when economically powerful Catalonia holds regional elections.

For now, the market is relieved that Spain remains relatively unified and that Rajoy can proceed with plans for stabilizing the country's economy, Schlossberg said.

The euro last traded at $1.3048, up 0.3 percent, with resistance expected around $1.3139, the Oct. 17 high. Traders reported talk of a large $1.3050 options expiry that could keep it pinned close to that level.

Expectations that Spain will apply for a bailout, prompting the European Central Bank to start buying its bonds, have helped support the euro in recent weeks, although uncertainty over the timing of such a move was also seen limiting gains.

"A lack of negative news out of Europe should help the euro for the moment, at least," said Richard Falkenhall, currency strategist at SEB in Stockholm.

He said the euro could rise to $1.34 or $1.35 over the coming weeks, adding that the U.S. presidential election and the country's looming "fiscal cliff" of budget cuts and tax hikes could switch the market's attention toward the United States and away from the euro zone.

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