* Euro zone inflation posts surprise fall
* Risk aversion, Japanese inflation helps yen,
* Dollar supported by month-end flows
* Canadian dollar comes close to new 4-1/2 year low
By Laurence Fletcher
LONDON, Jan 31 The euro fell on Friday as soft
euro zone inflation data reawakened concerns the European
Central Bank may have to act to avert deflation, while the yen
gained as investors looked for safe havens amid the emerging
The euro was 0.1 percent lower against the dollar at $1.3538
, while against the yen it hit a two-month trough of
Risk aversion also hit commodity-related currencies, with
the Canadian dollar falling to C$1.1198 per dollar,
within a whisker of a new four-and-a-half-year low.
Prices were affected as international investors changed the
hedges on their positions at the end of the month, while volumes
were light with large parts of Asia on holiday for the Lunar New
Euro zone inflation data on Friday showed a surprise drop to
0.7 percent year-on-year in January, while analysts had expected
a rise to 0.9 percent.
The fall could be a trigger for further easing by the
European Central Bank, which holds its policy review next week,
to sustain a fragile recovery and ward off deflation.
"I'm not sure if that's enough for them (the ECB) to make a
change in policy, but it's certainly worrisome," said Marshall
Gittler, head of global FX strategy at IronFX Global.
The spread between U.S. two-year government bonds yields
and German two-year yields also widened,
putting pressure on euro-dollar.
One London-based trader reported buyers for the euro on the
dips against the dollar, with range trading looking most likely
for the single currency.
IronFX's Gittler also pointed to the sell-off in emerging
markets as a headwind for the European economy.
That sell-off, however, has benefited the yen - last year's
weakest major currency - as the dollar fell 0.4 percent to
102.28 yen on Friday, with large option expiries at the
102.25 and 103 levels, according to one trader.
The yen 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
"The market is taking its cues from emerging markets to
quite a large degree," said Adam Cole, head of G10 FX strategy
at RBC Capital.
Another boost was Japan's core consumer price inflation,
which accelerated to 1.3 percent in January, the highest level
in five years.
But the Australian dollar, widely seen as a proxy for
riskier assets, was 0.9 percent lower at $0.8713.
The dollar index edged up 0.1 percent to 81.144,
helped by solid U.S. October-December growth numbers, which
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
RBC's Cole pointed to month-end flows being positive for the
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)."