FOREX-Yen falls further on prospect of aggressive BOJ action
* Markets positioned for aggressive action from BOJ
* Yen hits fresh 2-1/2 year low vs dollar
* Profit-taking may weigh on dollar/yen after BOJ
LONDON, Jan 18 (Reuters) - The yen hit a fresh 2-1/2 year low on Friday and was vulnerable to more losses on bets the Bank of Japan will ease monetary policy aggressively at a meeting early next week.
The dollar broke above reported options barriers at 90 yen to reach 90.21 yen on the EBS trading platform. It was last up 0.1 percent at 89.93 yen.
The U.S. currency has gained around 14 percent against the yen since early November, but further gains were expected if Japan's central bank takes measures beyond the market's central expectations in an attempt to stave off deflation.
Sources familiar with the BOJ's thinking told Reuters the central bank, under relentless pressure from Prime Minister Shinzo Abe, will consider making an open-ended commitment to buy assets until 2 percent inflation is in sight.
Such an plan would exceed market expectations, which have centered on the BOJ setting a 2 percent inflation target at its two-day meeting that ends on Tuesday and possibly increasing its asset-buying programme.
"A lot is priced in for next week's BOJ meeting. If asset purchases by the BOJ were unlimited that could lead to significantly higher levels in dollar/yen and euro/yen levels," said Peter Kinsella, currency strategist at Commerzbank.
"Levels past 93-95 yen within the next 2-3 weeks is not unreasonable."
But some analysts warned the BOJ could undershoot expectations and this could see the yen rebound.
"We think there is some risk of disappointment at the BOJ meeting and scope for a yen rally," said Kiran Kowshik, currency strategist at BNP Paribas.
"It is now consensus that the BOJ will move to a 2 percent inflation target. However, more aggressive measures may not come until closer to the nomination of the new governor/deputy governors in Q2."
Chart support for the dollar was seen 87.80 yen, the low struck on Wednesday, while it may stall ahead of a reported options barrier at 90.75 yen.
Resistance for dollar/yen was expected around 90.34, the 76.4 percent retracement of its May 2010-October 2011 fall. A break there would bring the 2010 high of 94.99 into view, strategists said.
The euro also rose against the yen to 120.73 yen on Friday, its highest since May 2011. It was last trading at 120.23, down 0.15 percent on the day.
Comments by Koichi Hamada, Abe's special economic adviser, saying a weakening of the yen to 95 or 100 to the dollar would be nothing to worry about, also piled pressure on to the Japanese currency.
The euro was down 0.2 percent at $1.3351, still close to an 11-month high of $1.3404 set on Monday.
Waning fears around the crisis in the euro zone and European Central Bank President Mario Draghi's upbeat comments last week have encouraged some investors to take on risky trades. This has helped boost the euro and pushed down the Swiss franc, a preferred refuge in times of financial turmoil.
The euro climbed to a 20-month high against the Swiss franc of 1.2568 francs, with analysts expecting the Swiss currency to remain weak.
Elsewhere, underscoring the yen's weakness, the Australian dollar scaled a high around 95.00 yen on Friday, its highest since August 2008.