* Yen falls to five-year lows vs dollar and euro
* Record levels on Wall Street weigh on low-yielding yen
* Sterling reaches highest versus dollar since Aug 2011
By Wanfeng Zhou
NEW YORK, Dec 27 The euro jumped to its
strongest level against the dollar in more than two years on
Friday as banks adjusted positions for the year end, while the
yen hit five-year lows for a second straight session.
The dollar was broadly weaker against European currencies,
including sterling and the Swiss franc. Thin liquidity likely
helped exaggerate market moves.
The European Central Bank will take a snapshot of the
capital positions of the region's banks at the end of 2013 for
an asset-quality review (AQR) next year to work out which of
them will need fresh funds. The upcoming review has created some
demand for euros to help shore up banks' balance sheets, traders
"There's a lot of attention on the AQR, and there's some
positioning ahead of the end of the calendar year," said John
Hardy, FX strategist at Danske Bank in Copenhagen.
Comments from Jens Weidmann, the Bundesbank chief and a
member of the European Central Bank Governing Council, also
helped the euro. He warned that although the euro zone's current
low interest rate is justified, weak inflation does not give a
license for "arbitrary monetary easing."
"With little else to trade off of for most of the week, the
market took the comment as an excuse to push the euro higher and
to trigger automatic buy orders in the single currency," said
Omer Esiner, chief market analyst at Commonwealth Foreign
Exchange in Washington.
The euro rose as high as $1.3892, according to Reuters data,
the highest since October 2011. It was last up 0.3 percent at
On the week, the euro was on pace for a gain of 0.5 percent
against the dollar.
The currency has risen more than 10 cents from a low hit in
July below $1.28, as the euro zone economy came out of a
recession triggered by its debt crisis.
Unlike the U.S. and Japanese central banks, the European
Central Bank has not been actively expanding its balance sheet,
giving an additional boost to the euro.
The yen touched a five-year trough against the dollar and
euro, dented by a renewed appetite for risk that lifted U.S. and
German equities to record highs and weighed on the low-yielding
The euro rallied 0.7 percent to 144.45 yen, having
hit 145.67 yen, the strongest since October 2008.
The dollar rose as high as 105.17 yen, according to
Reuters data, and was last at 105.14 yen, up 0.4 percent on the
The yen is on course to post its ninth consecutive week of
falls against the dollar, the longest such period since 1974,
when Japan was suffering from the aftermath of the oil crisis
that started the previous year.
Many economists expect inflation in Japan to peak soon,
forcing the Bank of Japan to take additional easing steps early
next year to counter the impact of a sales tax hike in April.
"It looks as if there may be more ahead in terms of easing,"
said Geoffrey Yu, currency strategist at UBS.
The yen's decline came in thin year-end trade and was a
continuation of a well-entrenched trend after Japanese
authorities this year launched a shock-and-awe stimulus strategy
to snap the economy out of years of deflation.
Treasury yields could rise further in 2014 if the Federal
Reserve continues to scale back its bond-buying program, having
last week taken the first step toward winding down its massive
Sterling rallied after strong British mortgage data
reinforced expectations the Bank of England may raise interest
rates sooner than previously anticipated.
Sterling reached its highest level versus the dollar since
August 2011, with a traders citing an option being triggered at
It reached a peak of $1.6577 before slipping slightly to
$1.6466, up 0.3 percent on the day.