* Euro hits 11-month peak vs dollar, 21-month high vs yen
* Banks to pay back more ECB loans than expected
* German Ifo data fuels demand for euro
By Nia Williams
LONDON, Jan 25 The euro hit an 11-month high
versus the dollar on Friday after the European Central Bank said
banks will repay 137 billion euros in cheap loans, reassuring
investors that the banking system is on the mend.
The single currency also hit a 21-month high against the
yen, helped by evidence of an economic upturn in Germany.
The ECB said 278 banks had decided to repay the three-year
crisis funds at the earliest opportunity next week, and the
total amount was more than the 100 billion euros forecast by
Strategists said banks' willingness to hand back the loans
would bolster confidence in the currency bloc and could help the
euro break through $1.35 in coming days.
The single currency rose 0.6 percent on the day to
$1.3465, its highest level since late February 2012. The next
near-term target for the euro is the 2012 high of $1.3486.
"Banks are in better shape than we thought before and the
higher (repayment) number is better for euro/dollar. Plus the
ECB is the only central bank amongst the majors that is
contracting its balance sheet," said Peter Kinsella, currency
strategist at Commerzbank in London.
"The euro could push through $1.35 but I'm not sure it's got
legs past $1.37," he added.
The ECB is the first major central bank to start moving away
from unconventional monetary policy measures, unlike the U.S.
Federal Reserve and Bank of Japan, which are buying bonds to
stimulate growth. Balance sheet expansion by a central bank
usually hurts a currency as it increases its supply.
Data showing German business morale improved for the third
month in a row in January, adding to signs growth in Europe's
largest economy is picking up, also fanned demand for the
The single currency rose more than 1 percent against the yen
to 122.50, its highest level since mid-April 2011.
"The Ifo number has been supportive of the euro and
investors want to go long," said Geoffrey Yu, currency
strategist at UBS. "It's all about momentum now, and data like
this only helps."
The euro has gained nearly 1 percent against the dollar and
1.8 percent against the yen this week as investors bet on more
gains, encouraged by falling euro zone peripheral bond yields.
In the options market, traders reported demand for euro
calls - or bets on more gains. One-month risk reversals
traded at 0.05 vols in favour of euro calls,
having flipped from euro puts.
BMO Capital Markets said it was the first time the
one-month had traded in this direction since October 2009.
The yen came under renewed pressure after reports on
Thursday quoted Japan's deputy economy minister as saying the
yen's decline was not over, and that a dollar/yen level of 100
would not be a concern.
The dollar rose to a 2-1/2 year high of 91.04 yen,
rising past reported options barrier at 90.75 and 91 yen. The
U.S. currency has gained more than 14 percent since
The yen's steep drop since late last year and government
efforts to ease fiscal and monetary policy have raised eyebrows
abroad, with German Chancellor Angela Merkel singling out Japan
on Thursday as a source of worry.
Japanese Finance Minister Taro Aso, shrugging off the
concerns, said on Friday the monetary easing was aimed at
pulling the country out of deflation, not manipulating
The dollar index inched lower to 79.83 as dollar
strength against the yen was outweighed by weakness against the