* Yen reverses gains after U.S. CPI data
* Investors expecting big LDP win in Japan election on
* Euro heads for biggest weekly gain vs dlr since late Nov
NEW YORK, Dec 14 The dollar surrendered early
gains and fell against the yen on Friday after a U.S. report on
inflation showed prices fell in November for the first time in
six months, which should allow the Federal Reserve to stay on
its ultra-easy monetary policy path.
The Labor Department said on Friday its Consumer Price Index
dropped 0.3 percent last month as a sharp decline in gasoline
prices offset increases in other areas. It was also the largest
drop since May and followed a 0.1 percent gain in October.
The Fed said on Wednesday it expected to hold interest rates
near zero until unemployment falls to at least 6.5 percent and
as long as inflation does not threaten to break above 2.5
percent and inflation expectations are contained.
"The inflation data continues to be benign and there is very
little in the way of price pressures in the economy," said
Omer Esiner, chief market analyst at Commonwealth Foreign
Exchange in Washington. "That therefore justifies the Federal
Reserve's action to keep a very accommodative monetary policy."
The dollar fell 0.1 percent to 83.52 yen, having
earlier risen as high as 83.96, its highest level since March
21. It was not far from its March 2012 peak of 84.187, which is
seen as a major resistance level.
Traders cited an options barrier at 84 yen with the options
market also showing increasing bias for more yen weakness with
investors increasingly buying yen puts.
Bets that the yen will weaken have risen significantly as
Japan looked set to get a prime minister keen to push for the
central bank to print more money to stimulate the moribund
Japanese media reported the conservative Liberal Democratic
Party (LDP) is set for a resounding victory in elections on
Sunday, cementing speculation LDP leader Shinzo Abe will be in a
strong position to push for bold monetary easing.
But the negative momentum for the yen ended sharply with the
U.S. CPI report which also spilled over into the euro's moves
against the yen.
The euro had climbed to an eight-month high of 109.98 yen
, and remains on track to end the week around 2.5
percent higher on the yen. But after the U.S. inflation data,
the euro slipped and was last at 109.24 yen, down 0.1 percent.
Option barriers were reported at 110 yen.
"This inflation report indicates the Fed can continue to
print as much money as it wants," said Joseph Trevisani, chief
market strategist at Worldwide Markets, Woodcliff Lake in New
The dollar has risen 5.5 percent against the yen in the past
month and there are technical signs the pair has risen too fast
in a short period of time, with its 14-day relative strength
index standing well above the "overbought" mark of 70.
Some said the yen may rally further next week if the Bank of
Japan underwhelms investors at its next meeting. The BoJ is
widely expected to loosen monetary policy, although there is
scope for market players to be disappointed by the amount of
assets it decides to purchase.
The euro was also on track for its biggest weekly
gain against the dollar since the week ending November 25. It
rose to a high of $1.3119, its highest level in more than a week
though it surrendered most of those gains to trade little
changed at $1.3074.
Traders cited central banks' offers to sell at $1.3135/40
with reported option barriers at $1.3150 and $1.3200.