FOREX-Euro drops from 7-mth high vs yen, Greece deal eyed

Mon Nov 26, 2012 4:53am EST

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* Markets hopeful of an aid deal for Greece later today

* Resumption of U.S. fiscal cliff talks also eyed

By Philip Baillie

LONDON, Nov 26 (Reuters) - The euro retreated from a seven-month high against the yen on Monday as traders booked profits on its recent rally, although expectations that Greece will secure new emergency loans would check losses.

Euro zone finance ministers meet on Monday for a third time in as many weeks to hammer out a deal to get international lenders to release aid to Greece in time for debt repayments due mid-December.

German Chancellor Angela Merkel has said that she was confident a deal could be reached, while the French finance minister said on Sunday an agreement was close.

A deal could give the euro a fillip, especially against the struggling yen which has been under pressure in the past few weeks on mounting speculation that a new government after next month's general elections will force the Bank of Japan to ease monetary policy aggressively.

The euro eased to 106.15 yen, having hit 107.135 yen on trading platform EBS in Asian trade, the single currency's strongest level since late April. The euro has risen nearly 4.5 percent in the past two weeks as investors and speculators added long positions and sold the yen.

Against the dollar, the euro was down 0.2 percent at $1.2955 , having hit $1.2991 on Friday, its highest level since late October.

The dollar was also weaker against the yen at 81.98 yen , with some investors unwinding their long positions built in recent weeks. There was talk of persistent buying interest among hedge funds for dollar/yen call options that expire in three to six months, suggesting that they are bullish on the dollar and bearish toward the yen.

"The market has been quite long euro/yen so it is quite natural that dollar/yen has had a bit of a pullback where euro/yen has done the same," said Daragh Maher, currency strategist at HSBC.

"I don't think there is any conviction in selling the euro as you may have some kind of announcement on Greece, which will probably see a pop higher."

Expectations of a deal for Greece overshadowed an election victory for separatists in the Spanish region of Catalonia on Sunday, albeit failing to get the resounding mandate needed to push convincingly for a referendum on independence.

The win raised some concerns of a potential negative impact on the Spanish economy and the country's finances as Catalonia makes up 20 percent of the economy and provides most tax revenue to the central government, a potential drag on the euro.

But HSBC's Maher said Greece was the main concern and with no sign of a referendum on independence in Spain for the next year at least, the euro was likely to hold on to its recent gains.

EYES ON US FISCAL CLIFF

With the euro ceding some ground, the dollar index edged off a three-week trough of 80.128 plumbed on Friday and last stood at 80.255.

Analysts at BNP Paribas said investors' demand for riskier currencies could continue if a Greek aid deal was finalised and the United States made progress on its own fiscal problem.

"Although a swift deal is probably too optimistic, we believe an eventual compromise will be achieved well before the end of the year," they said of the U.S. fiscal cliff talks, adding they expected the Federal Reserve to expand its quantitative easing programme at its December meeting as well.

"(This) combination of positive developments should, in our view, maintain this risk momentum over the coming weeks."

The White House and Congress are set to resume negotiations this week to avoid a series of automatic tax hikes and spending cuts worth $600 billion set for January, which analysts fear could tip the world's biggest economy into recession.

The growth-linked Australian dollar was trading steady at $1.0450, not far from a two-month high of $1.0480. The Canadian dollar was steady against the dollar, with the U.S. dollar at C$0.9933.

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