FOREX-Greece optimism drives euro higher
* Euro rises on optimism over Greece aid deal
* Yen edges up from 7-month lows vs dollar and euro
* German IFO awaited, could weigh on euro
By Anirban Nag
LONDON, Nov 23 (Reuters) - The euro rose to a three-week high against the dollar on Friday and was headed for its second week of gains on optimism that Greece's lenders were nearing an agreement to tackle the country's debt pile.
But the single currency's gains could be tested by data on German business morale due at 0900 GMT. The Ifo business climate index, a barometer of economic health in Europe's largest economy, is seen slipping to 99.5 in November from 100.0 last month.
"The market is getting a bit confident that a Greek deal will be struck. This will remove one of the near-term uncertainties in the euro zone and some of the short euro bets will be squeezed as a result. But I do not see the euro rising much beyond $1.30," RBS currency strategist Paul Robson said.
"While the short-term risks stemming from Greece wane, the medium-term risks in the euro zone from weaker growth and missed debt targets remain and that will see the euro struggle."
The euro rose past reported option barriers at $1.2900 to hit $1.2908 on trading platform EBS, up 0.2 percent on the day. Stop-loss buy orders are cited at $1.2920.
It has gained nearly 1.5 percent against the dollar in the past two weeks as yields on Greek bonds fell on expectations that euro zone ministers should be able to sign off on another tranche of aid for Greece on Monday.
The euro slipped from a seven-month high against the yen . It eased to 106 yen, down 0.2 percent on the day, and off its peak of 106.585 struck on Thursday.
The yen earned a respite from its steep losses made in the past two weeks. It has been under pressure on expectations of more aggressive monetary easing in Japan.
The dollar eased 0.3 percent to 82.17 yen, pulling away from Thursday's 7-1/2-month high of 82.84 yen, its strongest level since early April.
YEN OFF LOWS
The dollar has climbed 3.4 percent against the yen in the last two weeks, with the yen weakened by expectations that a likely new Japanese government after an election scheduled for December would push the Bank of Japan to implement more drastic monetary stimulus.
Shinzo Abe, the leader of Japan's opposition Liberal Democratic Party, which is tipped to win the election, has called for measures such as having the BOJ buy bonds issued specifically to fund public works projects and pushing short-term interest rates below zero.
His party's policy platform calls for setting a 2 percent inflation target, and seeks to ensure that the BOJ will pursue it vigorously with a possible revision to legislation that guarantees the central bank's independence.
In an interview with the Wall Street Journal published on Friday, Abe was also quoted as saying that he would consider postponing sales tax increases agreed in August if the economy remained mired in deflation.
Analysts said loose monetary measures along with lax fiscal policies could keep the yen under pressure and could see yen-funded carry trades return. Under these trades, investors sell the low-interest rate yen to buy more higher-yielding assets.
"Speculation is already growing that the yen will be the funding currency of choice for 2013 carry trades -- a view we tend to support," Chris Turner, head of FX strategy at ING, said in a note.
"Expect dollar/yen corrections to prove reasonably shallow, before we see a test of 83.20."
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