* BOJ seen easing at next Tuesday’s policy meeting
* U.S. Q3 GDP later Friday seen as next event risk
* Euro drifts lower, options suggest ranged trading
By Anirban Nag
LONDON, Oct 26 (Reuters) - The yen recovered after hitting a four-month low against the dollar on Friday, but was still on track for a second week of losses as investors braced for the Bank of Japan to ease policy next week.
The dollar was down 0.5 percent at 79.95 yen after earlier hitting 80.38 yen. Some investors booked profits on long dollar positions before the advance reading of U.S. third-quarter gross domestic product due later on Friday.
A robust GDP reading could see the dollar touch its June peak of 80.63 yen with the April peak of 81.78 a possible target. A disappointing number could see the dollar pare its recent gains.
The greenback was set to end the week higher, adding to last week’s rise of 1.1 percent and helped by widening spreads between two-year U.S. Treasuries and Japanese government bond yields, with which the dollar/yen has a strong relationship.
“Dollar/yen has risen well ahead of itself in the past few weeks and while on a multi-month basis we expect it to rise, there will be some profit taking in the short term to smoothen out the move,” said George Saravelos, G10 FX strategist at Deutsche Bank.
The yen was also higher against the euro. The euro shed 0.5 percent to 103.37 yen, moving away from a five-month peak of 104.59 yen on Tuesday.
“The yen has weakened on expectations of BOJ easing next week, but many are wondering if the old adage, ‘buy the rumour, sell the fact’ will hold true, and whether the dollar’s gains will last,” said Kimihiko Tomita, head of foreign exchange for State Street Global Markets in Tokyo.
“Looking at the very short term, we see yen weakness because it is about what the BOJ is going to do. But after that, it’s about what will the government do, and about macroeconomic factors,” he said.
The BOJ is expected to ease monetary policy at its meeting on Tuesday, by expanding asset purchases, and it might make a stronger commitment to keep pumping cash until its 1 percent inflation target is attained.
Japanese inflation data reinforced expectations the BOJ will ease, with core consumer prices falling for the fifth successive month in the year to September.
Lawmakers have kept steady pressure on the BOJ to play its part by stepping up efforts to support the economy. Japan’s cabinet approved a 422.6 billion yen ($5.3 billion) economic stimulus package of subsidies and tax grants on Friday that will tap budget reserves to avoid selling new debt.
After drifting lower for much of this week, the euro looked set to finish weaker, its outlook clouded by uncertainty about when Spain will request a bailout that could trigger the European Central Bank’s bond-buying programme.
The single currency was flat at $1.2930, well off its Oct. 17 high of $1.3140. The euro was seen as caught in a $1.2800/1.3200 range until Spain asks for aid, traders said. Bids from long-term investors were cited at $1.2905-10 with offers around $1.2960 and above $1.3000.
The euro has been weighed down by grim economic data from the euro zone and fresh signs that the region’s powerhouse, Germany was struggling.
Options market activity suggested the euro was likely to stay in a range against the dollar in the near term. One-month implied volatility was at 8.2 vols, up from around 8 vols on Thursday, but still near levels last seen two years ago.
The higher-yielding Australian dollar was down 0.2 percent at $1.0320, off the week’s high of $1.0397 hit on Thursday, as stock markets came under fresh selling pressure.