* Fed debate on scaling back QE helps to lift U.S. dollar
* Euro hit by weak euro zone PMI data
* Euro tries to defend 50 pct retracement of Nov-Feb rally
* Yen likely to post 1st substantial weekly gain in 3 months
* Pound under pressure on BoE expectations
By Hideyuki Sano
TOKYO, Feb 22 The dollar stayed near a
5-1/2-month high against a basket of currencies on Friday,
helped by doubts over just how long the U.S. Federal Reserve
will keep its quantitative easing in place.
The dollar's gains came as the euro tumbled to a six-week
low against it and a three-week trough against the yen, on
disappointing euro zone economic data and uncertainty ahead of
Italy's election this weekend.
The dollar index, which measures its value against a basket
of six major currencies, stood at 81.300 , having
risen past its Nov. 16 peak to 81.508 on Thursday, its highest
level since Sept. 5.
Minutes of the Federal Reserve's last meeting, released on
Wednesday, and comments from the bank's two top officials on
Thursday showed growing internal debate about scaling back its
bond buying programme.
Concerns that the Fed may stop providing a flood of cash to
banks boosted the dollar, at the expense of many other assets,
ranging from the euro and other risk currencies to stocks and
The euro fell to a six-week low of $1.31615 on Thursday and
last stood at $1.3199, near late U.S. levels.
Business activity indexes dealt a blow to hopes that the
euro zone might emerge from recession soon, showing the downturn
across the region's businesses unexpectedly worsened this month.
The data raised nervousness ahead of an influential German
Ifo business sentiment index due at 0900 GMT.
"After the euro's fall yesterday, we should be wary of risk
that weak Ifo figures cement concerns on the euro zone economy.
Given that the euro had been outperforming since late last year,
its correction could be large," said Junya Tanase, chief FX
strategist at JPMorgan Chase Bank.
In addition, the anxiety that Italy's national election this
weekend could lead to a fragmented parliament and a weak
government capped the euro.
But some market players think the euro is more likely to see
a relief rally after the election, expecting Pier Luigi
Bersani's centre-left bloc will ally with a centrist group led
by Prime Minister Mario Monti to form a stable government.
"The euro is capped now ahead of the Italian election but
once that uncertainty will have been cleared, the euro is likely
to rebound," said Kyosuke Suzuki, director of foreign exchange
at Societe Generale.
The currency is now trying to cling to an important chart
point of $1.3186, a 50 percent retracement of its 10.5-cent
rally from November to February.
Below that is another major support from its 90-day moving
average, at $1.3135, though a break there will leave it open for
a test of the Jan. 10 low of around $1.3040.
Against the yen, the euro fell to 122.25 yen, its
weakest level since late January. It traded at 123.05 yen in
early Asian trade, up slightly from late U.S. levels.
NO FOREIGN BOND BUYING
While the dollar gained across the board, the U.S. currency
failed to advance against the yen ash the Japanese currency's
three-month-old decline on monetary easing expectations is
showing signs of losing momentum.
The dollar stood flat in early Asian trade to fetch 93.13
yen, keeping some distance from its 33-month high of
94.47 hit last week.
"Judging from recent comments, most Japanese ministers don't
really wish to push the dollar/yen up beyond 95 yen. I suspect
if the yen weakens further, (Finance Minister Taro) Aso will try
to rein in the yen's fall," said Minori Uchida, chief strategist
at the Bank of Tokyo-Mitsubishi UFJ.
The yen looks set to post its first substantial weekly gain
since mid-November, when the announcement of a Japanese election
spurred investors to bet more political pressure would be put on
the Bank of Japan to take bold easing steps.
Speculators turned their gaze to the British pound, which
has fallen 1.7 percent so far this week, hitting a 2 1/2-year
low of $1.5130 on Thursday, on expectations of more quantitative
easing by the Bank of England.
Sterling has recovered a little to last trade at $1.5254
but it is still seen as vulnerable.
The Canadian dollar flirted with a seven-month low versus
the U.S. unit hit on Thursday, trading at C$1.0173 per U.S
dollar, near Thursday's low of C$1.0208.