* Japanese inflation highest in more than 5 years
* Euro zone inflation due at 1000 GMT
* Dollar supported by month-end flows
By Laurence Fletcher
LONDON, Jan 31 The yen gained ground on Friday,
helped by strong Japanese inflation data and its status as a
safe haven in the emerging market sell-off, while the euro was
soft ahead of its own inflation readout.
The dollar edged higher against most currencies, helped by
month-end flows and talk that central banks in emerging markets
who intervened in the markets to prop up their currencies may
buy dollars back.
Volumes were light with large parts of Asia on holiday for
the Lunar New Year.
The dollar was 0.2 percent down against the yen - which has
found support as a safe haven during the emerging market
sell-off - at 102.55 yen, with large option expiries at
the 102.25 and 103 levels, according to one trader.
The euro dropped to a new eight-week trough of 138.68 yen
. Against the dollar it was marginally lower at $1.3554
Japan's core consumer price inflation accelerated to 1.3
percent in January, the highest level in five years, as Japan
has pursued aggressive monetary easing for more than a year to
"This is positive news for the yen as it reduces the need
for the Bank of Japan to add to its stimulus program... I expect
the yen can appreciate further, however, as I do not think the
emerging market crisis is over yet, just moved to a different
neighborhood," said Marshall Gittler, head of global FX strategy
at IronFX Global.
The yen - last year's weakest major currency - also rose as
the Nikkei fell. The two tend to move in opposite
directions, with a rally in the index often a signal for
speculators to sell the yen and buy higher-yielding currencies,
while that trade may be unwound when risk appetite falls.
Adam Cole, head of G10 FX strategy at RBC Capital, pointed
to euro zone inflation, due at 1000 GMT, as the "pick of the
Investors will look to the reading, which is expected to
edge up to 0.9 percent year-on-year, for signs that the currency
bloc is moving away from a threat of deflation as its fledgling
recovery takes hold.
"It's potentially important. If you get an undershoot,
you'll get people worrying about (a policy response)," said
The ECB holds its policy review next week, with any sign of
a greater willingness to take additional easing steps seen as
putting further pressure on the common currency.
There was little support for the euro ahead of the numbers,
with German retail sales coming in well below forecast with a
2.5 percent fall month-on-month, compared with forecasts for a
0.2 percent rise, after German inflation on Thursday stayed
The greenback was also supported after solid U.S.
October-December growth numbers revived hopes that the global
economy could, on the whole, take troubles from emerging markets
in its stride.
Traders said that was enough to support the view that the
Federal Reserve can continue to wind down its stimulus
programme, boosting the dollar's attraction against other major
"The factors we look at suggest month-end flows are
dollar-positive," said Cole.
There was also talk in the market that emerging market
central banks may buy back dollars.
"That is a possibility," Cole added. "If you've seen
intervention to support their currencies then they'd be
recycling to replenish dollars (that they'd spent propping up
their own currencies)."
The dollar index rose 0.04 percent to 81.078.