FOREX-Yen weakens broadly before Japan election

Fri Dec 14, 2012 7:21am EST

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* Yen poised to end week sharply lower vs major currencies

* Markets expecting big LDP win in Japan election on Sunday

* Euro heads for biggest weekly gain vs dlr since late Nov

By Anirban Nag

LONDON, Dec 14 (Reuters) - The yen fell against the dollar and euro on Friday and looked vulnerable to further selling on expectations that the Bank of Japan will ease monetary policy aggressively in coming months.

The euro was steady versus the dollar after euro zone flash PMI numbers were broadly in line with expectations. Sentiment towards the shared currency has picked up slightly following a successful Greek debt buyback and after an agreement was reached on a single euro zone banking supervisor.

The dollar climbed 0.2 percent to 83.77 yen, having earlier risen as high as 83.96, its highest level since March 21. It was not far from its March 2012 peak of 84.187, which is seen as a major resistance level.

Traders cited an options barrier at 84 yen with the options market also showing increasing bias for more yen weakness with investors increasingly buying yen puts.

"The yen is the only game in town with volumes thinning out," said Peter Allwright, head trader at fund manager house RWC Partners. "Investors are short yen heading into the election and even in the longer term we expect the yen to weaken."

Bets the yen will weaken have risen significantly as Japan looked set to get a prime minister keen to push for more money printing by the central bank to stimulate the moribund economy.

Japanese media reported the conservative Liberal Democratic Party (LDP) is set for a resounding victory in elections on Sunday, cementing speculation LDP leader Shinzo Abe will be in a strong position to push for bold easing.

"Abe has been making pretty strong comments about inflation targeting and if we look at the economy Japan needs a lower currency without a doubt," said Maurice Pomery, managing director at consultants Strategic Alpha.

"This is going to put pressure on the BoJ. It's the start of a move lower in the yen that has a long way to go."

The dollar has risen 5.5 percent against the yen in the past month and technically there are signs the pair has risen too fast in a short period of time, with its relative strength index standing well above the "overbought" mark of 70.

Some said the yen may regain some lost ground if the Bank of Japan underwhelms investors when it meets next week. The BoJ is widely expected to loosen monetary policy, although there is scope for market players to be disappointed by the amount of asset purchases it decides to do.

EURO HOLDS GROUND

The euro rose to an eight-month high of 109.98 yen , and was on track to end the week almost 3 percent higher on the yen. It was last trading at 109.59 yen, up 0.2 percent on the day with option barriers reported at 110 yen.

The euro was also on track for its biggest weekly gains against the dollar in three weeks. It rose to a high of $1.3120, its highest level in more than a week and was last trading at $1.3087, close to flat on the day.

Traders cited offers to sell from central banks at $1.3135/40 with reported option barriers at $1.3150 and $1.3200.

"The euro is well supported and the PMIs were decent," said Beat Siegenthaler, currency analyst at UBS. "In the short term it looks as a buy on dips with positive developments (in) the Greek debt buyback and a single banking supervisor also helping sentiment."

Markit's Flash Composite Purchasing Managers' Index, which polls around 5,000 businesses across the 17-nation bloc and is viewed as a reliable growth indicator, rose to a nine-month high of 47.3 in December, beating forecasts for a rise to 46.8.

But the index still pointed to a contraction within the currency bloc, keeping alive risks of an interest rate cut by the European Central Bank in coming months.

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