* Yen near recent lows ahead of BOJ, ECB meetings
* Portugal's aid request unlikely to change ECB rate hike
* Yen faces long-term slide but correction risks imminent
By Natsuko Waki
TOKYO, April 7 The yen held near a six-month low
against the dollar on Thursday and an 11-month trough versus the
euro ahead of monetary policy meetings in Japan and the euro
zone that are expected to reinforce widening interest rate
The euro held near the previous day's 14-month peak against
the dollar ahead of an expected euro zone interest rate hike,
with more tightening signals anticipated from the European
Central Bank seen offsetting concerns about the euro zone debt
after Portugal's request for European financial aid.
The Bank of Japan is expected to keep monetary policy on
hold but signal its readiness to ease policy further, bucking a
global trend of central banks withdrawing excess liquidity put
in place during the financial crisis.
Interest rate differentials have become the major driver in
currency markets, reviving interest in carry trades, which
involve selling the low-yielding yen to make overseas
investments that bring higher returns.
Many believe this trade may be running out of steam in the
near term, however, with Thursday's monetary policy meetings by
the BOJ and ECB possibly a catalyst for correction.
"The yen has been falling on expectations of diverging
monetary policies between Japan, the United States and the euro
zone. The market ignored Portugal's request for aid because it
was seen unlikely to stop the ECB from raising interest rates,"
said Teppei Ino, an analyst at bank of Tokyo-Mitsubishi UFJ.
"Japan's trade surplus is expected to shrink, which could
scale down fundamental upward pressure on the currency. But in
the near term, a lot of moves have been driven by speculative
flows and it may have moved too fast and now may be the time for
the market to cool down."
The dollar stood at 85.47 yen , having risen as high
as 85.54 earlier, almost 10 yen above its record low of 76.25
yen hit in March, days after Japan's earthquake.
"Fears that Japanese manufacturing will be 'hollowed out' by
a stronger currency, the risk of further monetary easing by the
Bank of Japan, a lack of compelling investment options at home
for Japanese investors and the desire by local households to
earn higher returns abroad should all weigh on the yen in 2011
and 2012," UBS said in a note to clients.
UBS raised its long-term dollar/yen forecast to 90 yen by
the end of 2011 from 85, and 100 yen by the end of 2012 from 90.
In the near term however, resistance around the November
high of 85.94 yen is hindering the dollar's further advance. The
area around 85.40 to 85.95 includes a 50 percent retracement of
the decline from the May peak, as well as a downtrend line from
the 2007 cycle high.
The euro rose as high as 122.55 yen , just ticks
away from the previous day's 11-month peak.
The yield spread between two-year euro zone and Japanese
government bonds rose to 164.6 basis
points, its highest since December 2008.
The single European currency stood at $1.4328 , having
risen to $1.4350, its highest since late January 2010, on
The ECB is set to raise its benchmark rate by 25 basis
points for the first time since July 2008. Many analysts say ECB
President Jean-Claude Trichet must sound hawkish enough to keep
alive expectations for around 100 basis points of rate hikes
expected by November and for the euro to enjoy fresh gains.
Another concern for the euro is the region's persistent debt
crisis. Portugal became the third euro zone member to seek a
bailout from the European Union, with the size of the package
expected to be around 60-80 billion euros ($85-114
Higher euro zone interest rates would be likely to make it
difficult for debt-laden peripheral countries by raising their
already high borrowing costs.
On the other hand, higher oil prices are expected to support
the euro as oil-rich countries convert part of their dollar
revenues into the single currency for diversification. Brent
crude oil prices rose to a 2-1/2 year high above $123 a barrel
on Wednesday LCOc1.
The expectation for higher euro zone rates contrasted with
uncertainty in the United States over when the Federal Reserve
may begin to tighten policy. The U.S. economy remains too
fragile for the Fed to begin raising rates, Atlanta Fed
President Dennis Lockhart said on Wednesday [ID:nN06207079].
The dollar was steady at 75.563 against a basket of
($1 = 0.703 Euros)
(Editing by Michael Watson)