* Yen falls to fresh five-year lows vs USD & euro
* Record close on Wall Street weighs on low-yielding yen
* Sterling reaches highest versus dollar since Aug 2011
By Simon Falush
LONDON, 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.
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.
This has created some demand for euros to help shore up
their balance sheets, traders said.
"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.
The euro gained 1.1 percent to $1.3846, and touched the
day's high of $1.3894, having earlier touched its highest since
It 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.
Moves were exaggerated because liquidity was thin, traders
said, but analysts said the euro was likely to hold its strength
"Market price actions tend to be corrected as liquidity
comes back, but I doubt that (this will happen) this time
around," Hidetoshi Honda, currency strategist at Mizuho
Corporate Bank said.
"Although there's no fundamental reasons to draw the euro
higher, there's unlikely to be considerable retracement as
liquidity comes back because the damage is already done."
Unlike the U.S. and Japanese central banks, the European
Central Bank has not been expanding its balance sheet actively,
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 which lifted U.S.
and German equities to record highs and weighed on the
It is on course to post its ninth consecutive week of falls
against the dollar, the longest such period since 1974, when the
country 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 dollar rose as high as 105.05 yen before
retreating to 104.92 yen, while the euro rose to 144.67 yen
- highs not seen since October 2008.
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 programme,
having last week taken the first step towards winding down its
massive stimulus plan.
The greenback also advanced against dollar-bloc commodity
currencies such as the Australian dollar, but fell against
sterling after strong British mortgage data reinforced
expectations the Bank of England may raise interest rates sooner
than previously anticipated.
Sterling reached its highest versus the dollar since August
2011, with a traders citing an option being triggered at $1.65.
It reached a peak of $1.6577 before slipping slightly to