* Japan's Aso says not considering foreign bond purchases
* German ZEW unexpectedly soars to highest since April 2010
* Euro gains prove short-lived, Italy election worries weigh
* Dollar/yen faces solid resistance around 94.50 yen
By Gertrude Chavez-Dreyfuss
NEW YORK, Feb 19 The yen climbed amid open
disagreement between Japan's Prime Minister and Finance Minister
that muddled the outlook for the country's monetary policy.
Japanese Finance Minister Taro Aso said on Tuesday he was
not considering buying foreign bonds as part of efforts to ease
monetary policy, a day after Prime Minister Shinzo Abe said this
was an option.
The rift created a two-way risk for dollar/yen trades.
Markets still expect Japan to ease policy aggressively -- a
negative for the yen -- but the approach is less clear-cut,
which could slow the currency's fall.
In addition, although Japan was not singled out at this
weekend's Group of 20 meeting for monetary and fiscal measures
that have resulted in yen weakness, Choi Hee Nam, South Korea's
director-general at its finance ministry, said Japan's policies
were not endorsed by the group and did spark controversy,
according to a report from Bloomberg News.
"Developments in the past few days highlight the fact that
there are internal rifts on the policy approach and there may be
external constraints on what sort of easing measures Japan's
partners will deem acceptable," said Shaun Osborne, chief
currency strategist at TD Securities in Toronto.
He added that near-term downside risks loom large for the
dollar against the yen.
In midday New York trading, the dollar fell 0.5
percent to 93.55 yen, well below a peak of 94.22 yen hit on
Monday after Japan escaped direct criticism from its G20 peers
at the weekend. However, it remained above chart support at
93.38 yen, the 200-hour moving average.
With the dollar having risen about 20 percent since
mid-November, investors have hesitated to re-test last week's
33-month high of 94.47 yen, when it failed to breach a reported
options barrier at 94.50.
Some strategists said the yen's fall could also slow as
investors become wary of betting on further yen weakness until
there is more clarity on who will become the next Bank of Japan
Tokyo has delayed nominating a new governor for its central
bank by a week, fanning talk of friction between the prime
minister and the finance minister on the issue.
The euro was down 0.2 percent against the yen at 125.21 yen
EURO GAINS ON UPBEAT ZEW SURVEY
Against the dollar, the euro recovered by midday trading to
hit the day's high of $1.3394. It was last at $1.3387, up
0.3 percent in mostly choppy trading. An upbeat German economic
sentiment survey helped boost euro sentiment. The ZEW index rose
to its highest since April 2010, beating even the highest
forecast in a Reuters poll.
The euro moved further away from a three-week low of $1.3306
hit on Friday, with traders reporting bids at $1.3310-15.
Investors, however, grew cautious ahead of the Italian
elections this weekend, which should cap any euro rally.
"The euro has derived no obvious benefit from the better
German data," said Bob Lynch, chief currency strategist at HSBC
in New York. He cited several bearish technical indicators on
euro/dollar, such as the five-day moving average close to
crossing the 40-day moving average.
All those indicators suggest more downside than upside risk
for the euro against the dollar, Lynch said, and he would look
to sell toward the $1.3400 area.
Europe's shared currency also rose sharply against sterling,
gaining 0.5 percent to 86.78 pence on growing
speculation that the UK could lose its triple-A credit rating.
The euro has come under selling pressure in the wake of
recent data revealing a deeper-than-forecast euro zone recession
and on concerns that Italy's Feb. 24-25 election could fragment
parliament, potentially hampering the country's reform efforts.
The dollar index, meanwhile, slipped 0.1 percent to 80.488,
still within striking distance of the 80.727 six-week
high hit on Monday.