FOREX-Dollar retreats from highs versus yen on profit taking
* Dollar retreats from 2 1/2-year high vs yen
* Yen weak after Abe pushes BOJ to ease policy
* Euro/dollar firm near 8 1/2-month peak on Draghi commentsŸ
LONDON, Jan 11 (Reuters) - The yen regained some ground against the dollar on Friday as investors took profits after the U.S. currency soared to a 2 1/2-year high on increasing bets of further easing by the Bank of Japan.
Analysts said such dips in dollar/yen were only temporary, with the overall trend of yen weakness intact. Some expect to see the dollar well above 90 yen in coming months.
The dollar had risen as high as 89.35 yen earlier on Friday, its strongest since June 2010, breaking the 30-year resistance line of 89.30 yen, after Japanese Prime Minister Shinzo Abe's government approved a $117 billion fiscal stimulus package, its largest since the financial crisis.
Abe also said the Bank of Japan should consider adding employment to its existing mandate of price stability.
Investors saw the dollar's steep ascent as an opportunity to take profit on their long dollar/yen positions. The dollar was last trading at 88.85 yen, up 0.1 percent on the day, but a breach of options barriers cited at 89.50 yen could propel it higher.
"We have seen all the way down from below 80 yen investors starting to put on very large long dollar/yen positions and now we are starting to see them take profit on these positions," said Michael Sneyd, FX strategist at BNP Paribas.
The euro also retreated from 118.58 yen hit earlier on Friday, its highest level since May 2011, to trade flat on the day at 117.85 yen.
The euro had risen broadly after European Central Bank President Mario Draghi on Thursday gave no indication of near-term cuts in interest rates.
Against the yen, the dollar has risen around 1 percent in the course of this week, while the euro has risen around 2.6 percent. Analysts said the current weakness in the yen is likely to persist.
Ian Stannard, head of European FX strategy at Morgan Stanley said the pullbacks in dollar/yen have been very shallow and this underlines the strength of this trend.
"The pace of increase not just (in dollar/yen) but also the pace of policy reforms in Japan is exceeding market expectations," said Stannard.
"As a result we have raised our forecast even further ... looking for dollar/yen to move towards the 95 level by the end of this quarter."
Data showing Japan's first current account deficit in 10 months also put pressure on the yen. The deficit of 222.4 billion yen ($2.5 billion) in November was far larger than the 3.5 billion yen ($39 million) deficit forecast.
The yen has been sinking since November on speculation the BOJ could ease policy further. Analysts expect the BOJ to adopt an explicit 2 percent inflation target at its policy meeting on Jan. 21-22, to fall in line with the aims of the government.
If the BOJ fails to ease as aggressively as expected, strategists say dollar/yen could edge a bit lower but investors will likely move back into long dollar/yen positions if it falls to the Jan. 8 trough of 86.90 yen, which would act as support.
Draghi's comments pushed the euro up 1.6 percent on Thursday, its biggest daily gain in five months and to a one-week high against the dollar.
The euro was flat on the day against the dollar on Friday at $1.3275, not far from an 8 1/2-month peak of $1.33085 hit last month.
The euro's ascent helped it to a four-month high against the Swiss franc of 1.2175 francs.
The euro did not react to Friday's Italian bond auction which saw two-year yields moving to their lowest levels since March 2010.
"The Italian debt auction was somewhat sidelined after yesterday's very positive Spanish auction and Draghi's comments so we aren't surprised that we haven't seen any aggressive price actions post the auction," BNP Paribas' Sneyd said.