* Euro hits highest since early December 2011 vs dollar
* Yen gains versus dollar
* Fed expected to reaffirm QE expectations
By Wanfeng Zhou
NEW YORK, Jan 29 The euro rose to a 14-month
high against the dollar on Tuesday, lifted by an improving
outlook for the euro zone and expectations the Federal Reserve
will maintain its ultra-easy monetary policy for the foreseeable
Positive German economic data and signs European banks were
on the mend, boosted hopes that the worst of the euro zone
crisis was over, driving the euro up more than 2 percent so far
Analysts said the euro's rally has further to go. The dollar
could struggle if the Fed, at the end of its two-day meeting on
Wednesday, reinforces expectations for a continuation of
quantitative easing beyond this year.
"Even though last month's meeting's minutes showed that Fed
governors were divided on whether to continue the QE policy, it
is the feeling of most traders that QE will not end during 2013
but rather will continue well beyond that date," said Matthew
Lifson, senior analyst and trader at Cambridge Mercantile Group
in Princeton, New Jersey.
"If this is the case and the statement from the Fed backs
this up, then the pressure on the U.S. dollar will increase."
The euro rose as high as $1.3493 on Reuters data, the
highest since Dec. 2, 2011, and was last up 0.2 percent at
$1.3478. It rose above major resistance at $1.3486, its 2012
high and $1.3492, the 50 percent retracement from the high in
May 2011 to the low in July 2012.
Analysts at Action Economics said buying by U.K. and German
names helped drive the euro's latest move higher. They said
proprietary names and an Asian central bank are on the offer
into $1.3500 -- a psychologically important level. Defense of
the $1.3500 option barrier may also limit the momentum.
The euro briefly rose and hit a session high after data
showed U.S. consumer confidence dropped in January to its lowest
level in more than a year.
The dollar dropped against the yen, slipping further away
from a 2-1/2 year high hit a day earlier, but analysts said yen
weakness will resume as investors look to buy the dollar back at
Traders cited demand for 6-month yen puts, or bets the
currency would fall, from a U.S. investor who bet dollar/yen
would rise to 97 yen in six months through option strikes.
The dollar slipped 0.3 percent to 90.60 yen, down
from Monday's high of 91.25 yen, its strongest level since June
2010. Traders reported options barriers at 91.50 and 92 yen.
Selling the yen has been mostly a one-way trade since
mid-November, based on expectations that Japanese Prime Minister
Shinzo Abe would push the Bank of Japan into more forceful
monetary easing to beat deflation.
"Should there to be any correction down to 88 yen, it would
be a good buy area. The overall trend (for dollar/yen) will be
higher, particularly in March-April when we start discussing the
new BOJ governor," said Chris Turner, head of FX strategy at
Present BOJ Governor Masaaki Shirakawa, whose term ends in
April, is expected to be replaced with a more dovish governor,
who could then bring forward any easing, giving further impetus
to yen bears.