May 19, 2014 / 8:07 AM / 3 years ago

FOREX-Yen on verge of breakout after U.S. yields slide

* Yen hits 2-month high against dollar
    * Euro steadies after two weeks of decline
    * Euro zone PMI data in focus this week
    * Fed minutes, China PMI, Japan trade data awaited this week

    By Patrick Graham
    LONDON, May 19 (Reuters) - The dollar struggled to hold an
important support level against the yen on Monday, hit by a
fall-off in expectations for higher U.S. interest rates, while
the pound faced pressure from signs a major merger deal will
fail.
    Were the yen to drop below 101.20 yen per dollar, it
would be the first time since November of last year that it has
traded stronger than its 200-day moving average and in nominal
terms the strongest since early February.
    That reflects both a dip in U.S. treasury yields in the past
week and the dollar's broader problems with delivering the
strength many had expected of it this year.
    At the start of European trading the yen changed hands at
its strongest in two months at 101.24 yen before retreating a
touch. 
    "My sense is that we will push through 101.20," said Alvin
Tann, a currency strategist with Societe Generale in London. 
    "The chief reason is the slide in U.S. 10-year yields - I
think dollar yen will follow that move and wouldn't be surprised
if we got down to levels of 100 to 100.5."
    It has been a choppy couple of weeks for major currency
markets, hamstrung this year by a lack of clear differentiation
between the respective economic stories of Japan, Europe and the
United States. 
    While growth is now moving at different rates, interest
rates in all three remain rooted to rock bottom, although signs
the European Central Bank is preparing further measures to
loosen monetary conditions knocked the euro back last week. 
    The single currency gained 0.2 percent on Monday to $1.3717
 after a volatile session on Friday. 
    Analysts from Credit Agricole said that the euro's
resistance to further losses at the end of last week raised
prospects it may head higher. 
    "This week's focus will be on PMI releases, which we expect
to confirm a trend of further improving growth conditions," they
said in a morning note. 
    "Under such conditions, position squaring-related EUR upside
cannot be excluded. We advise against selling the single
currency around the current levels. From a broader angle,
however, we expect rallies to remain a sell."
    
    PFIZER BLOW
    Merger activity around a handful of Britain's biggest
companies has been one factor helping sterling this year, and
dealers said AstraZeneca's rejection of Pfizer's 
latest bid may put some pressure on the UK currency. 
    "There are people talking about sales of the pound after
this news," said one London-based currency dealer. "I don't know
if that's because Pfizer had genuinely done some of this
business or just because some people had been betting on it, but
it would be a disappointment." 
    The pound, one of this year's better performers among the
majors thanks to an improving economy, was a touch lower to the
euro in early trade but largely unchanged against the dollar. 
    Investors also await minutes later this week of the Federal
Reserve's April 29-30 policy meeting, as well as a private
survey on China's manufacturing sector for May.
  
    The dollar index stood at 79.98, down slightly on the
day after notching up a modest 0.2 percent gain last week, when
it touched a six-week peak of 80.338 on Thursday.
    Commodity currencies were sluggish as well with the
Australian dollar just a touch lower at $0.9356 
following a flat week. Traders said the 94 U.S. cent level is
still providing a cap for the Aussie for now.

 (Editing by John Stonestreet)

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