* 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 The euro climbed to an 11-month
peak against the dollar and a 21-month high versus the yen on
Friday after the European Central Bank said banks will repay 137
billion euros in loans, reinforcing the view that the region's
banking system is on the mend.
A report showing improvement in business confidence in
Germany also underpinned the euro.
The ECB said 278 banks decided to repay the three-year
crisis funds at the earliest opportunity next week, and the
total amount was more than the 100 billion euros forecast by
This should bolter confidence in the euro zone and help the
euro break through $1.35.
"Many view this as the turn in the crisis, which has helped
support the euro," said Camilla Sutton, chief currency
strategist at Scotiabank in Toronto.
Europe's shared currency rose 0.6 percent on the day
to $1.3449, after hitting $1.3469, its highest since late
February 2012. The next near-term target for the euro is the
2012 high of $1.3486.
Sutton also said the euro is rapidly approaching three major
resistance levels. Aside from this year's high of $1.3486, she
also cited $1.3492, the 50 percent retracement of the May 2011
to July 2012 collapse, and the psychologically-important
$1.3500-figure, all of which are within reach.
But she said "we would not position too early for the
downside and would instead trade with the trend until it
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. Asset purchases by a central bank that
effectively expands its balance sheet tend to hurt a currency as
it increases its supply.
Data showing German business morale improved for the third
month in a row in January, adding to signs that growth in
Europe's largest economy is picking up, also fanned demand for
the euro.. It followed a positive private sector
activity report in the euro zone's largest economy.
The single currency rose 1.4 percent against the yen to
122.45 yen. Earlier, the euro touched 122.77, its
highest since mid-April 2011.
The German data "has been supportive of the euro and
investors want to go long," said Geoffrey Yu, currency
strategist at UBS. "It's all about momentum now, and data like
this only helps."
The euro has gained nearly 1 percent against the dollar and
1.8 percent against 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. One-month risk reversals
traded at 0.05 vols in favour of euro calls,
having flipped from euro puts.
BMO Capital Markets said it was the first time the one-month
had traded in this direction since October 2009.
The yen came under renewed pressure after reports on
Thursday quoted Japan's deputy economy minister as saying the
yen'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
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 research note said the yen's downside
momentum remained strong. However, it added that the
back-and-forth statements about yen weakness between foreign
politicians and Japanese officials should continue heading into
the meeting of the Group of 20 developed and emerging market
economies. That should potentially add to yen volatility, the
One-month volatility in dollar/yen edged up on Friday to
11.45 percent after Merkel expressed concern about a