Yen rallies after strong GDP; dollar softer

LONDON (Reuters) - The yen hit a one-month high against a broadly softer dollar on Thursday after Japanese fourth quarter growth data came in surprisingly strong, reviving talk of a Bank of Japan rate hike next week.

The dollar continued losing ground, hitting a fresh six-week low against the euro, after comments on Wednesday from U.S. Federal Reserve Chairman Ben Bernanke rekindled debate about the prospect of a U.S. rate cut.

Japan's economy expanded at an annualized 4.8 percent in the October-December quarter, beating market expectations for growth of 3.8 percent, thanks to a recovery in personal consumption.

The figures stoked talk of a possible rate hike from 0.25 percent when the BOJ policy board meets on February 20-21.

Several Japanese politicians said the GDP data proved the economy was on the recovery path and Prime Minister Shinzo Abe said it was up to the BOJ to decide on monetary policy.

Analysts said this seemed to suggest that unlike last month, the BOJ will not come under political pressure not to hike.

"Now the GDP has been confirmed as very strong, the BOJ has probably got the green light from the government to do what it likes ... and I think that markets are now beginning to say that there will either be a hike next week or certainly in the next five weeks," said Peter Frank, senior FX strategist at ABN AMRO.

By 1205 GMT, the dollar was down half a percent on the day at 120.07 yen JPY=, having hit a low of 119.79 earlier -- last seen on January 11. The euro fell to 157.65 yen EURJPY=, retreating from a record peak of 159 yen scaled on Monday.

However, analysts cautioned against expecting too much further strength for the yen, given that even if the BOJ bumped up rates to a decade-high 0.5 percent, they would still be by far the lowest in the industrialized world.

A Reuters poll found market players split on whether the BOJ will raise rates next week, with 24 of 49 traders and analysts in Tokyo's currency and bond markets expecting a move. <BOJ/INT>

DOLLAR ON BACKFOOT

The euro was steady at $1.3129 EUR=, after hitting a six-week high of $1.3154 earlier.

The dollar stayed on the defensive, having dropped sharply in the wake of Bernanke's comments on Wednesday that inflationary pressures were starting to ease, convincing some investors that the Fed was done with tightening for now.

Bernanke is due to testify again before Congress later on Thursday. Investors will also be on the lookout for U.S. export and import prices, New York Fed manufacturing data and figures on flow of foreign capital into the United States.

STERLING, STOKKIE FALL

Sterling weakened on news that UK retail sales fell unexpectedly in January as the Bank of England's third rate hike in six months took its toll on consumers. The data prompted markets to scale back expectations of any further tightening.

The Swedish crown hit a three-month low against the euro EURSEK= after the Riksbank raised rates to 3.25 percent as forecast, but expectations for further tightening were knocked by surprisingly soft January core inflation data and comments from the bank that it may pause after one further rate hike.

"Euro/stokkie is selling off dramatically on the back of the statement. The market is saying the interest rate differential with the euro zone will remain negative for stokkie, so stokkie is a new funding currency," said Michael Klawitter at Dresdner Kleinwort in Frankfurt.