* Euro hits 16-month high vs yen, 8-1/2-month peak vs dollar
* German Ifo rises for 2nd straight month
* BoJ expected to ease policy on Thursday
By Gertrude Chavez-Dreyfuss
NEW YORK, Dec 19 The euro surged to a 16-month
high against the yen and an 8-1/2- month peak versus the dollar
on Wednesday, bolstered by better-than-expected German business
confidence data and increasing optimism about debt-burdened
The yen also weakened to its lowest in more than a year-and-
a-half against the dollar on expectations the Bank of Japan will
ease monetary policy at the end of its two-day policy meeting on
Many analysts said the euro could extend gains against both
the dollar and yen thanks to year-end demand from corporate and
long-term investors in thin trading conditions. Currency
speculators are also cutting short euro positions built earlier
this year as worries about the euro zone have eased.
Germany's Ifo survey showed business sentiment rose for a
second straight month in December, raising hopes Europe's
largest economy will get back on track after stumbling a little
bit the last few months. The expectations component of the Ifo
survey also advanced.
"The euro is doing well across the board and there are
fundamental drivers here," said Vassili Serebriakov, currency
strategist at BNP Paribas in New York.
"We had good data from Germany, plus we're getting the sense
there is a smooth resolution of the Greek problem."
The euro rose 0.9 percent to 112.41 yen, hitting
112.49, its highest since August 2011. Investors took out a
reported options barrier at 112 yen.
Against the dollar, the single euro zone currency
rose to $1.3308, its strongest level since early April. Many
analysts said the next target for the euro is the late March
high just below $1.34.
On Tuesday, ratings agency Standard & Poor's raised Greece's
credit rating after the country completed its bond buyback
program. S&P gave Greece a stable outlook given the euro zone
countries' commitment to support Greece's membership in the
European bloc. That helped the euro trade on a
firmer note overnight.
Tentative signs of progress in U.S. budget talks also helped
to lift sentiment toward assets linked to growth.
"Well-established trends look to be the best bet for today's
session and for the euro it's onwards and upwards," said Shaun
Osborne, chief currency strategist at TD Securities in Toronto.
"Provided we don't get a 'fiscal cliff' shock, a persistent
grind higher looks to be the most likely scenario, which could
see euro/dollar in the upper $1.35 area in the next few weeks."
If U.S. policymakers do reach a compromise to avert steep
tax increases and spending cuts early next year, strategists
said currencies that tend to gain on a better global growth
outlook - like the euro and Australian dollar - should benefit.
The dollar index fell to a two-month low of 79.008.
It was last at 79.115, down 0.3 percent.
BROAD YEN WEAKNESS
The dollar, however, rose against the yen to a
20-month high of 84.61 yen as it broke through an option barrier
at 84.50 yen. It triggered stop-loss buy orders above that
The dollar last changed hands at 84.56 yen, up 0.4 percent.
Traders reported steady buying of short-dated topside
strikes in the dollar/yen options, reflecting the likelihood of
more weakness in the yen.
Expectations of looser policy from the BoJ, which tend to
weigh on the yen, have been bolstered by a landslide election
victory for Japan's Liberal Democratic Party (LDP) at the
weekend. The LDP is committed to aggressive monetary easing.
The BoJ concludes its two-day policy meeting on Thursday and
is widely expected to announce another round of monetary easing.
Fourteen of 19 economists polled by Reuters last week said
they expected the BoJ to ease this week, most likely by
increasing its 91 trillion yen ($1 trillion) asset-buying and
lending programme by up to 10 trillion yen.
Some analysts, however, warned that BoJ measures could fall
short of expectations, leading some to buy back the yen.
"Markets are getting pretty excited about tomorrow's BoJ
announcement, rightly or wrongly. Profit-taking either into the
BOJ or directly after makes sense both in dollar/yen and the
Nikkei," said Geoff Kendrick, FX strategist at Nomura in London,
who said the BoJ was more likely to take strong measures in