FOREX-Euro rallies on German Ifo, yen lags before BOJ
* Euro climbs on better German Ifo survey
* Yen hits lowest level vs euro since August 2011
* BOJ expected to ease policy on Thursday
By Nia Williams
LONDON, Dec 19 (Reuters) - The euro rose to a 16-month high against the yen and an 8-1/2 month peak against the dollar on Wednesday, bolstered by better-than-expected German business confidence data.
The yen also weakened to its lowest in more than a year-and- a-half against the dollar on expectations the Bank of Japan will ease monetary policy at the end of its two-day policy meeting that ends on Thursday.
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. Currency speculators are also cutting short euro positions built earlier this year as worries about the euro zone showed signs of waning.
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. The expectations component of the Ifo survey also rose.
The euro rose 0.6 percent to 112.305 yen, its highest level since early August 2011, taking out a reported options barrier at 112 yen.
Against the dollar, the single currency rose to its highest since early April of $1.3294. Many analysts said the next target for the euro is the late March high just below $1.34.
"There's a rise in expectations (in the Ifo survey) and that's what we need for better future growth," said Lutz Karpowitz, FX strategist at Commerzbank. "This makes an (ECB) rate cut more unlikely in the beginning of 2013 and that should be positive for the euro."
Tentative signs of progress in U.S. budget talks also helped to lift sentiment towards assets linked to growth.
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 79.062.
BROAD YEN WEAKNESS
But the dollar rose against the yen to a 20-month high of 84.58 yen and rising past an option barrier at 84.50 yen. It triggered stop-loss buy orders above that level.
Traders reported steady buying of short-dated topside strikes in the dollar/yen options, reflecting more weakness in store for the Japanese yen.
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.
The BOJ concludes its two-day policy meeting on Thursday and is widely expected to announce another round of monetary easing.
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.
Some analysts warned BOJ measures could fall short of expectations. This may prompt some 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.
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.