* Markets position for aggressive action from Bank of Japan
* U.S. consumer sentiment in January hits lowest in over a
* China data softer than expected
* Euro hits 20-month high versus Swiss franc
By Julie Haviv
NEW YORK, Jan 18 The yen dropped for a second
straight day against the dollar on Friday, trading within
striking distance of a 31-month low as investors position for
aggressive action from the Bank of Japan next week.
The dollar has gained 3.7 percent in value against the yen
so far this year and most strategists believe the U.S. currency
is poised to continue appreciating if the BOJ early next week
takes steps beyond market expectations in an attempt to stave
While investors opted to book profits in the euro versus the
yen, the single currency shared by 17 counties remained 4.7
percent higher on the year.
Concerns about global growth also weighed on the euro after
China, the world's second largest economy, reported slowing
growth in 2012. The data also weighed on growth-correleted
currencies, such as the Australian and New Zealand dollars.
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.
"This is a big deal," said Jens Nordvig, global head of
currency strategy at Nomura Securities in New York.
"But as always from a trading perspective, it matters
greatly what is already priced," he said.
Such a 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
Nomura conducted a survey of clients and the results showed
that the inflation target announcement is already widely
expected, but those who were surveyed remained uncertain about
its asset purchase program.
There is a possibility that the BoJ moves to an open-ended
commitment on this front, Nordvig said.
The dollar hit a high of 90.18 during the global session,
its highest since June 2010. It last traded up 0.1 percent at
89.94 yen. Strategists cited chart support at 87.80 yen,
the low struck on Wednesday, while reported options barrier at
90.75 yen could act as a near-term resistance.
"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
Traders reported strong demand for options betting on
further yen weakness, with one-month dollar/yen implied
volatility -- a measure of expected price movement --
rising to its highest since August 2011.
One-month risk reversals showed demand to buy
yen puts, or bets on the yen falling, also rose.
But some analysts said the BOJ could undershoot expectations
and this could see the yen rebound.
The dollar could gain over the next month due to its status
as a safe-haven as U.S. politicians debate how to raise the
country's borrowing limit, the so-called debt ceiling.
U.S. consumer sentiment deteriorated for a second straight
month to hit its lowest in over a year in January, with a record
number of consumers citing the recent "fiscal cliff" debate in
Washington, a survey released on Friday showed.
The euro last traded 0.3 percent lower against the yen
at 119.78 yen, down from 120.70 hit earlier - its
highest since May 2011.
The euro was also down against the dollar, falling 0.3
percent on the day to $1.3328. It had earlier hit
$1.3401, just shy of a 11-month high of $1.3403 set on Monday.
The could remain under pressure if concerns about global
China's economy grew at its slowest pace in 13 years in
2012, though a year-end spurt supported by infrastructure
spending and a jump in trade signalled the foundation for the
stable growth path Beijing says is vital for economic reform may
be in sight.
Easing concerns about 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 riskier
trades. This has helped boost the euro and pushed down the Swiss
franc, a preferred refuge in times of financial stress.
"Draghi's comments that he expected a recovery in the euro
zone in 2013 surprised markets and helped move the euro higher
against the dollar and especially against the Swiss franc,"
Credit Suisse's Berg said.
He expects the euro to hit $1.35 over the next few weeks,
after which it would likely consolidate around those levels.
It climbed to a 20-month high against the Swiss franc
of 1.2568 francs, with analysts expecting the Swiss
currency to remain weak.