FOREX-Euro rallies as German Ifo adds to year-end demand
* Euro climbs broadly on better German Ifo survey
* Yen hits lowest level vs euro since August 2011
* BOJ kicks off 2-day meeting, expected to ease policy
By Nia Williams
LONDON, Dec 19 (Reuters) - The euro hit a 16-month high against the yen and 7-1/2 month peak against the dollar on Wednesday, helped by better-than-expected German business confidence data.
The yen also weakened broadly on expectations the Bank of Japan will unveil more monetary stimulus when its two-day policy meeting ends on Thursday.
Germany's Ifo survey showed business sentiment rose for the second month running in December, raising hopes that Europe's largest economy will recover quickly from a weak end to the year.
Many analysts said the euro could extend gains against both the dollar and yen thanks to year-end demand from corporate and long-term investors in thin trading conditions.
"The Ifo helps create more risk appetite in general and positive equity markets, which is positive for the euro. It adds to the upwards momentum in euro/dollar and euro/yen," said Niels Christensen, FX strategist at Nordea.
The euro rose 0.6 percent to 112.13 yen, its highest level since August 2011, taking out a reported options barrier at 112 yen.
Against the dollar, the single currency matched its early May peak of $1.3284. Many analysts said the next target for the euro is the late March high just below $1.34.
Tentative signs of progress in U.S. budget talks also helped to lift market sentiment.
If U.S. policymakers do reach a compromise to avert steep tax hikes and spending cuts early next year, strategists said currencies that tend to gain on a better global growth outlook - like the euro and Australian dollar - should benefit.
The dollar index fell to a two-month low of 79.094.
BROAD YEN WEAKNESS
The dollar rose 0.25 percent to 84.39 yen, close to Monday's 20-month high of 84.48 yen. Traders cited an options barrier at 84.50 yen and stop-loss buy orders above that level.
Expectations of looser policy from the BOJ, which tend to weigh on the yen, have been bolstered by a landslide election victory for Japan's Liberal Democratic Party (LDP) at the weekend. The LDP is committed to aggressive monetary easing.
Persistent selling interest from non-Japanese players has helped to drag the yen lower, said Jesper Bargmann, Asia head of G11 spot FX for RBS in Singapore. He expected the dollar to stay supported ahead of BOJ's policy decision on Thursday.
Some analysts warned any BOJ measures may fall short of market expectations however, which could prompt some investors to buy back the yen.
"Markets are getting pretty excited about tomorrow's BOJ announcement, rightly or wrongly. Profit-taking either into the BOJ or directly after makes sense both in dollar/yen and the Nikkei," said Geoff Kendrick, FX strategist at Nomura, who said the BOJ was more likely to take strong measures in 2013.
Fourteen of 19 economists polled by Reuters last week said they expected the BOJ to ease this week, most likely by increasing its 91 trillion yen ($1 trillion) asset-buying and lending programme by up to 10 trillion yen.
Investors are also focused on whether the BOJ will raise its inflation target. Several sources familiar with the BOJ's thinking have said the central bank will consider no later than January whether to adopt a 2 percent target.
In addition to speculation that the BOJ might ramp up monetary easing in coming months, a deterioration in Japan's trade balance has also contributed to the recent bets against the yen.