* Yen hits 3 1/2-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 The dollar slid to its weakest
against the yen in more than three months on Monday as
expectations of higher U.S. interest rates faded. The pound
faced pressure from signs a major merger will fail.
The yen's break past 101.20 yen per dollar was the
first time since November that it has traded stronger than its
200-day moving average. In nominal terms, it is the strongest
since early February.
That reflected both a dip in U.S. treasury yields in the
past week and the dollar's broader failure to deliver the
strength many had expected this year.
But dealers said there were options barriers around 101.00
and talk of official buyers in Japan around 100.80 yen. That
will block any further push before a two-day meeting of the Bank
of Japan starts on Tuesday, they said.
"There does seem to be a lot of daylight above these levels,
but around here I've gone into wait-and-see mode," said one
London-based currency dealer.
"I'm not quite sure if the market has the energy at the
moment to follow through on these kinds of moves. There do seem
to be bids around 100.80/100.75 and we have the BoJ meeting
coming up as well."
The yen reached as high as 101.10 in morning trade in Europe
"The chief reason is the slide in U.S. 10-year yields," said
Alvin Tann, a currency strategist with Societe Generale in
London. "I wouldn't be surprised if we got down to levels of 100
It has been a choppy couple of weeks for major currency
markets, hamstrung this year by a lack of clear differentiation
between the economic stories of Japan, Europe and the United
Growth is now moving at different rates, although official
borrowing costs in all three remain near rock bottom. Signs the
European Central Bank is preparing to loosen monetary conditions
even further 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."
Merger activity around a handful of Britain's biggest
companies has been one factor helping sterling this year, and
some dealers said AstraZeneca's rejection of Pfizer's
latest bid could put some pressure on the UK currency.
The pound's performance gave little sign of it by midday on
Monday, however. Sterling, one of this year's better performers
among the majors thanks to an improving economy, fell just 0.1
percent versus the euro and was almost unchanged against the
"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."
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 79.952, 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 $0.9353
following a flat week. Traders said the 94 U.S. cent level is
still providing a cap for the Aussie for now.
(Editing by Larry King)