FOREX -Euro advances as USD, yen stay out of favour
* Euro extends recent gains on dollar and yen
* Mersch plays down prospect of ECB going QE
* Fed's Bullard talks about possibility of small taper this month
By Ian Chua
SYDNEY, Dec 10 (Reuters) - The euro stayed bid in Asia on Tuesday, having scaled a fresh five-year high on the yen and six-week peak against the dollar as expectations for further stimulus from the European Central Bank continued to fade.
ECB Executive Board member Yves Mersch on Monday played down the prospect of following the Federal Reserve and Bank of Japan down the path of asset-purchases, saying such action poses immense challenges for the central bank.
The euro last traded at 141.83 yen, having come within a hair's breadth of 142.00, a high not seen since October 2008. Against the dollar, the common currency bought $1.3736 , creeping ever closer to a two-year high of $1.3833 set two months ago.
The euro has been gaining ground since the ECB last week refrained from following up November's surprise rate cut and said it has yet to come up with a detailed plan of which policy tools to use and when.
At the same time, there appears to be a general acceptance among investors that the Federal Reserve will soon scale back its bond-buying program as the economy continues to improve.
Indeed, Dallas Fed President Richard Fisher said financial markets are in a "better position to accept" a reduction in stimulus than they have been before.
St. Louis Fed President James Bullard said the Fed could slightly reduce its monthly bond purchases this month in reaction to signs of an improved labour market. The Fed holds its policy meeting next week.
"That to me signals that when taper does happen it will be a token of faith to the markets," said Evan Lucas, market strategist at IG in Melbourne.
"I believe that any moves in the asset purchase program will be a token affair as its second mandate of inflation is still well behind expectations."
Economists polled by Reuters on Monday suspect the Fed will begin reducing its massive bond-buying program in March, but some are warming up to the idea of a December or January taper.
Traders said markets have pretty much priced in the risk of the Fed scaling back support soon, which might help explain why the dollar hasn't risen broadly in the past few sessions.
In fact, a robust euro has knocked the dollar index to its lowest level in six weeks.
Against the yen though, the greenback rose to 103.35 and was close to a five-year peak of 103.74 set back in May.
The Japanese currency continues to be the funding currency of choice thanks to the BOJ's ultra-loose monetary policy and expectations of more easing next year when tax hikes kick in.
Another standout currency was sterling, which has risen strongly in recent weeks thanks to a brightening outlook for the domestic economy.
In fact, Bank of England Governor Mark Carney said on Monday the country's economic recovery is on its way to achieving self-sustaining momentum.
Carney though said monetary policy will need to remain exceptionally loose for some time to come, although sterling bulls paid no heed to that.
The pound last traded at $1.6416, within easy reach of a two-year high of $1.6443 set a week earlier. It also gained ground against the euro, sending the common currency to 83.62 pence from 84.06.
The focus in Asia is likely to rest on China's industrial output and retail sales due around 0530 GMT.
Recent data has given hope the world's second biggest economy is regaining some momentum since arresting a protracted slowdown in the middle of the year. Confirmation of that view will help underpin risk appetite.
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