* Euro slips but still up versus dollar for 2013
* Euro helped by AQR; strength baffles hedge funds
* Dollar set for best gain vs yen in 34 years
By Laurence Fletcher
LONDON, Dec 31 The euro eased back on Tuesday
but was still on track to be the world's best-performing major
currency this year, while the dollar was set for its biggest
annual gain against the yen since 1979.
The single currency has gained 26 percent against the yen
this year. It dipped 0.2 percent to 144.78 yen on
Tuesday, having set a five-year high of 145.67 yen on Friday.
Against the dollar the euro has gained more than 4 percent
this year, baffling many hedge funds who had expected a weak
euro zone economy and a reduction in Federal Reserve bond-buying
to strengthen the greenback this year.
The euro was 0.2 percent down at $1.3770, as the gap
between U.S. two-year government bond yields and
German yields widened, increasing the relative
attractiveness of the dollar.
The euro has been boosted recently by banks in the region
repatriating funds to shore up their capital bases before an
asset quality review by the European Central Bank, and as banks
repay cheap crisis loans to the ECB, tightening liquidity.
Comments at the weekend form ECB President Mario Draghi that
he saw no urgent need to cut the euro zone's main interest rate
further and saw no signs of deflation also helped the euro.
The dollar slipped 0.1 percent to 105.09 yen, but was
up 21 percent for 2013, its biggest annual gain since a 23.7
percent rise in 1979, according to Thomson Reuters data.
Paul Chappell, CIO of UK-based hedge fund manager C-View,
said the euro tends to lose ground in the first few days of a
new year. He is positive on the dollar, which he believes will
be boosted by a recovering U.S. economy.
"We think things are going to be very data-dependent," he
said. "At the moment that looks like U.S. numbers are going to
be relatively robust compared with some other G7 peers, so the
dollar is likely to be relatively robust versus other developed
Differing outlooks for monetary policy in the United States
and Japan have been key to the dollar's surge against the yen,
with investors expecting the Bank of Japan to maintain or even
increase its massive stimulus to beat deflation.
The yen also retreated as sentiment on the U.S. and European
economies improved, and as investors looked to borrow funds
cheaply and then invest them in riskier assets.
Satoshi Okagawa, senior global markets analyst for Sumitomo
Mitsui Banking Corporation in Singapore, saw the dollar rising
to 110 yen in the first half of 2013, before retreating below
100 yen mid-year and then re-testing 110 yen in late 2014.
The Swiss franc hovered near a three-decade peak against the
yen, fetching 118.04 yen. The franc touched 119.17
yen on Friday, its highest since January 1983.
C-View's Chappell added, "We're very much into year-end
where individual currencies are flopping around a bit,
predicated on year-end flows."