* Euro at 6-1/2 month high versus yen, 2-week high vs dollar
* Helped by expectations of an eventual Greek deal
* Euro zone flash manufacturing PMI not as bad as forecast
* Yen slides to 7-1/2 month low versus dollar
By Jessica Mortimer
LONDON, Nov 22 The euro extended its gains
against a weaker yen on Thursday, hitting its highest since
early May on expectations a Greek funding deal would eventually
be agreed and that Japan would ease monetary policy further.
The euro was also helped by euro zone data showing
manufacturing activity slowed less than expected in November.
It hit a two-week high against the dollar.
The figures marginally eased worries about a deepening euro
zone recession, especially after an earlier survey revealed
manufacturing in China expanded for the first time in 13 months.
The euro rose 0.5 percent to 106.585 yen. More
gains could see it target chart resistance at the 100-week
moving average around 106.69 yen. A weekly close above that
level could leave it poised to rise further.
The single currency rose 0.2 percent on the day to $1.2869
, near a peak of $1.28765 reached on Nov. 7.
"The driving factors behind euro/dollar are that the global
macroeconomic backdrop seems to be improving and people are
pricing out the tail risk on Greece ... There is less concern
about whether a deal on Greece will eventually be struck," said
Arne Lohmann Rasmussen, head of currency research at Danske
He said this was encouraging investors to square recent
short positions in the euro and other riskier currencies before
the long weekend in the United States. Volumes would be thin,
however, due to the U.S. Thanksgiving holiday on Thursday.
But traders said reported demand to sell the euro above
$1.2880 may stem its rise.
German Chancellor Angela Merkel said on Wednesday an
agreement to release aid to Athens was still possible next
Monday, helping the euro recover after Greece's international
lenders had earlier failed to reach a deal.
Danske's Rasmussen added that expectations of more monetary
easing in Japan would encourage yen-funded carry trades, in
which investors borrow in low-yielding currencies like the yen
in order to investor in higher-yielding assets.
He said the euro could rise to $1.33 and to 110 yen early
next year, while the dollar could hit 85 yen or more.
The dollar has climbed around 4 percent against the yen in
the last seven trading sessions, with the yen weakened by market
expectations that the next Japanese government could push the
Bank of Japan to implement more drastic monetary stimulus.
The dollar rose to 82.84 yen, its highest since early
April. The yen also hit a 7-1/2 month low versus the
higher-yielding Australian dollar and against
Shinzo Abe, the leader of Japan's opposition Liberal
Democratic Party, which holds a commanding lead in opinion polls
before an election on Dec. 16, has called for "unlimited" easing
until 2 or 3 percent inflation is achieved, as well as pushing
short-term interest rates to zero or below.
Analysts say yen weakness could persist until the election
"Obviously it's based on the fact that if Abe wins, it's all
going to be further easing and further measures to weaken the
yen," said Andrew Robinson, FX analyst for Saxo Capital Markets
in Singapore. "I think we have a bit further to go."
Meanwhile, optimism on the U.S. budget front has grown after
leading legislators recently expressed confidence that they
could reach a deal to avert the so-called fiscal cliff of
spending cuts and tax hikes due to take effect in early 2013.
The Australian dollar was up 0.1 percent at $1.0374
. Earlier, it touched $1.0401 after the upbeat survey on
manufacturing in China, Australia's biggest export market.