* Dollar slips from 31-month high
* Long-term trend of yen weakness still in place - analysts
* Markets positioned for aggressive action from BOJ
* Fading euro zone crisis fears keeps euro firm
By Anooja Debnath
LONDON, Jan 18 The dollar retreated from a
31-month high against the yen on Friday as investors took profit
on its steep rise before expected aggressive policy easing next
week by the Bank of Japan.
Strategists said the fall in the dollar would likely be
short-lived and the Japanese currency remained vulnerable to
further losses if the BOJ takes steps beyond market expectations
in an attempt to stave off deflation.
The dollar was down 0.1 percent against the yen at
89.81 yen. Strategists cited chart support at 87.80 yen, the low
struck on Wednesday, while reported options barrier at 90.75 yen
could act as a near-term resistance.
Earlier the dollar broke above options barriers at 90 yen to
reach 90.21 on the EBS trading platform, its highest
level since June 2010.
"This is just profit taking... The general trend
speculators, hedge funds and investors are betting on at the
moment is towards further yen weakness," said Bernd Berg, global
FX strategist at Credit Suisse.
"We think this trend is going to continue unless the BOJ
disappoints, which I think is unlikely."
Sources familiar with the BOJ's thinking told Reuters the
central bank, under relentless pressure from Prime Minister
Shinzo Abe, will consider making an open-ended commitment to buy
assets until 2 percent inflation is in sight.
Such a plan would exceed market expectations, which have
centered on the BOJ setting a 2 percent inflation target at its
two-day meeting that ends on Tuesday and possibly increasing its
"A lot is priced in for next week's BOJ meeting. If asset
purchases by the BOJ were unlimited that could lead to
significantly higher levels in dollar/yen and euro/yen levels,"
said Peter Kinsella, currency strategist at Commerzbank.
"Levels past 93-95 yen within the next 2-3 weeks is not
Traders reported strong demand for options betting on
further yen weakness, with one-month dollar/yen implied
volatility - a measure of expected price movement -
rising to its highest since August 2011.
One-month risk reversals showed demand to buy
yen puts - or bets on the yen falling - also rose.
But some analysts said the BOJ could undershoot expectations
and this could see the yen rebound.
The euro fell 0.3 percent against the yen to
119.92 yen from 120.73 hit earlier - its highest since May 2011.
The euro was also down against the dollar, falling 0.2
percent on the day to $1.3355. It had earlier hit
$1.3399, just shy of a 11-month high of $1.3404 set on Monday.
But strategists said the euro was likely to remain strong in
the near term.
Easing concerns about the crisis in the euro zone and
European Central Bank President Mario Draghi's upbeat comments
last week have encouraged some investors to take on riskier
trades. This has helped boost the euro and pushed down the Swiss
franc, a preferred refuge in times of financial stress.
"Draghi's comments that he expected a recovery in the euro
zone in 2013 surprised markets and helped move the euro higher
against the dollar and especially against the Swiss franc,"
Credit Suisse's Berg said.
He expects the euro to hit $1.35 over the next few weeks,
after which it would likely consolidate around those levels.
It climbed to a 20-month high against the Swiss franc
of 1.2568 francs, with analysts expecting the Swiss
currency to remain weak.