* Euro hovers near 14-month high vs dollar
* Single currency may head towards $1.37 -analysts
* Fed keeps bond-buying stimulus in place
By Ian Chua and Masayuki Kitano
SYDNEY/SINGAPORE, Jan 31 The euro held near a
14-month peak against the dollar and a 2-1/2 year high versus
the yen on Thursday, supported by expectations for central banks
in the United States and Japan to keep an aggressive easing
The U.S. Federal Reserve underscored that view by leaving in
place its monthly $85 billion bond-buying stimulus plan on
Wednesday, arguing the support was needed to lower unemployment.
The euro edged up 0.1 percent to $1.3579, nearing
Wednesday's high of $1.3588, its strongest level since November
Seeming to support the Fed's cautious view, data on
Wednesday showed the U.S. economy unexpectedly contracted in the
fourth quarter. Still, a lot of that weakness came from a plunge
in defence spending, suggesting the underlying fundamentals were
not as bad as the headline figures indicated.
European data on Wednesday showed economic sentiment
improved for a third straight month, a sign the euro zone is
emerging from a low point and diminishing the chance of a rate
cut from the European Central Bank.
With the euro having breached key resistance at $1.35,
analysts say its rally may have more room to run.
"Euro/dollar we now think will rise to $1.37. The euro
crosses are also likely to benefit from the return of exiled
capital that left the euro zone," said Gareth Berry, G10 FX
strategist for UBS in Singapore.
"Europe is not out of the crisis yet, there is still lots of
uncertainty out there, but there has been enough stabilisation
to encourage some investors to return," he added.
News last week about euro zone banks' early repayments of
three-year loans to the European Central Bank was seen as a sign
that parts of the euro zone banking system may be on the mend.
Still, one reason to be cautious is a contrast between signs
of decreasing financial market stress in the euro zone and the
region's still lacklustre economic fundamentals, said Daisuke
Karakama, market economist for Mizuho Corporate Bank in Tokyo.
"Market-related gauges for the euro zone such as equities,
government bond yields and credit default swaps...have shown a
broad improvement," Karakama said.
But some economic indicators such as a record high
unemployment rate paint a bleaker picture, he said. Data
released earlier this month showed that the euro zone
unemployment rate hit a record 11.8 percent in November.
"A rise toward $1.37 or $1.38 can't be ruled out on the back
of the current trend, but I don't think you should view a move
like that as one that is based on a positive view of (economic)
fundamentals," Karakama said, referring to the euro.
YEN SEEN HEADING LOWER
Against the yen, the single currency held steady at 123.53
yen, near a peak of 123.87 yen set on Wednesday,
which marked the euro's highest level against the Japanese
currency since May 2010.
Expectations that new Japanese Prime Minister Shinzo Abe
would push the Bank of Japan into more aggressive monetary
easing to beat deflation have made selling the yen a one-way bet
in the past few weeks.
The dollar slipped 0.1 percent to 90.97 yen, having hit a
2-1/2 year high of 91.41 yen on Wednesday, the
greenback's strongest level versus the yen since June 2010.
"Yen depreciation has more room to go, in our view. We now
look for the yen to depreciate to 96 and 100 versus the USD in 6
months and 12 months, respectively," analysts at Barclays
Capital wrote in a client note.
Traders said the market focus will now turn to the U.S.
employment report on Friday for the latest read on the health of
the world's biggest economy.