FOREX-Euro firms as bank repayments to ECB relieve crisis fears
* Euro zone banks to repay more ECB loans than expected * German business confidence data fuels demand for euro * Yen weakness continues; Japan defends yen policy By Gertrude Chavez-Dreyfuss NEW YORK, Jan 25 (Reuters) - The euro scaled 11-month peaks against the dollar and 21-month highs versus the yen on Friday after the European Central Bank announced a higher-than-expected level of loan repayments by banks, affirming the view that the region's debt crisis has turned the corner. A survey showing improvement in business confidence in Germany also underpinned the euro, which was on track for its best one-day gain in two weeks. The ECB said 278 banks decided to repay 137 billion euros in three-year crisis funds at the earliest opportunity next week. The total amount topped traders' forecast for repayment 100 billion euros. "The larger-than-expected repayment should have some impact on euro zone liquidity conditions and is also seen as another sign that the European crisis continues to ebb," said Nick Bennenbroek, head of currency strategy, at Wells Fargo Bank in New York. Europe's shared currency rose 0.6 percent on the day to $1.3455, after hitting $1.3479, its highest since late last February. Camilla Sutton, chief currency strategist at Scotiabank in Toronto said the euro is rapidly approaching three major resistance levels. She cited this year's high of $1.3486, the 50 percent retracement of the May 2011 to July 2012 collapse at $1.3492, and the psychologically-important $1.3500 figure, all of which are within reach. But Sutton cautioned, "We would not position too early for the downside and would instead trade with the trend until it breaks." The ECB is the first major central bank to start moving away from unconventional monetary policy measures, unlike the U.S. Federal Reserve and Bank of Japan, which are buying bonds to stimulate growth. When a central banks purchases assets, effectively expanding its balance sheet, the country's currency tends to be hurt because it increases the currency's supply. Reflecting a dramatic improvement in the euro zone's funding conditions, the cross currency basis swap, or the relative premium for swapping euro Libor for dollar Libor, on Friday traded at -17.5 basis points on three-month contracts , the lowest premium in 20 months. A lower swap premium suggests fewer demand for the greenback and diminished funding stress in the euro zone. Also on Friday, data showing German business morale improved for a third straight month in January fanned demand for the euro. The data added to signs that growth in Europe's largest economy is picking up and followed a positive private sector activity report on Germany. Against the yen, the single currency rose 1.4 percent to 122.45 yen. Earlier, the euro touched 122.77 yen, its highest level since mid-April 2011. The euro has gained more than 1 percent against the dollar and more than 2 percent versus the yen this week as investors bet on more gains, encouraged by falling euro zone peripheral bond yields. In the options market, traders reported demand for euro calls, which are bets on more gains, although one-month risk reversals on Friday still showed a minor bias for puts or more euro weakness. However, this was the smallest euro put level since November 2009. YEN WEAKENS The yen came under renewed pressure after reports on Thursday quoted Japan's deputy economy minister as saying the currency's decline was not over and a dollar/yen level of 100 would not be a concern. The dollar rose to a 2-1/2-year high of 91.19 yen, rising past reported options barrier at 90.75 and 91 yen. The U.S. currency has gained more than 14 percent since mid-November. The greenback has gained for 11 straight weeks versus the yen. The yen's steep drop since late last year and government efforts to ease fiscal and monetary policy have raised eyebrows abroad, with German Chancellor Angela Merkel singling out Japan on Thursday as a source of worry. Japanese Finance Minister Taro Aso, shrugging off Merkel's concerns, said on Friday monetary easing was aimed at pulling the country out of deflation, not manipulating currencies. BNP Paribas in a note said the yen's downside momentum remained strong, but the back-and-forth statements about the currency's weakness between foreign politicians and Japanese officials should exacerbate volatility. One-month volatility in dollar/yen edged up on Friday to 11.32 percent, possibly in the wake of Merkel's concern about a weak yen.