* BOJ’s Kuroda comments drive yen to highs
* Aussie on defensive after being hit by host of negatives
* Econ outlook, fiscal austerity to underpin Aussie - analyst (Updates prices, quotes)
By Anirban Nag
LONDON, May 21 (Reuters) - The yen rose to a 3-1/2 month high against the dollar and the euro on Wednesday, buoyed by optimistic comments from Bank of Japan chief Haruhiko Kuroda which gave no hint of further monetary easing in the near term.
Adding to the dollar’s woes were lower U.S. Treasury yields which diminishes the greenback’s appeal. U.S. bond yields fell on Tuesday after New York Federal Reserve President William Dudley said the central bank would likely be gradual in raising interest rates.
Investors are also keeping an eye on the Federal Reserve’s April policy meeting minutes due later in the day. While the Fed is not expected to raise rates until at least the middle of next year, investors will be keen to learn whether officials discussed the myriad issues about policy normalisation.
The dollar fell to a 3-1/2-month low against the yen of 100.805 yen in early London trade after Kuroda said a Japanese economic recovery was on track after the sales tax hike in April. The tax hike was expected to dampen consumer demand and put pressure on the BoJ to ease policy in coming months.
But Kuroda gave nothing away about further easing. He said that the massive asset purchase programme launched last year was still working and was having its desired effect.
The BoJ also raised its assessment on capital expenditure and Kuroda reiterated that Japan is on course to meet the bank’s 2 percent inflation target in about a year from now.
The euro was also down 0.2 percent at 138.40, having fallen to 138.23 yen, its lowest since early February.
“Kuroda’s comments are lowering expectations of further BoJ stimulus. Investors have been long dollar/short yen so there is position squaring going on which is driving the dollar lower,” said Manuel Oliveri FX strategist at Credit Agricole.
“At the same time one has to be cautious about the FOMC minutes with Yellen also due to speak later in the day.”
Federal Reserve Chair Janet Yellen is scheduled to give a commencement address and receive an honorary degree in New York later in the day.
The drop in U.S. yields was also helping the euro. The euro rose 0.15 percent to $1.3717, pulling away from a 2-1/2 month low of $1.3648 hit last week on expectations the European Central Bank will ease monetary policy in June.
The euro is unlikely to make much headway ahead of potentially destabilising European Parliament elections later this week, where votes for anti-austerity, Eurosceptic parties look set to increase.
The Australian dollar extended losses against its U.S. counterpart and plumbed a fresh two-week low, hurt by a host of negative factors. The Aussie slipped 0.1 percent to $0.9226 after brushing $0.9216, its lowest since May 2.
The currency was knocked by a slide in prices of iron ore, Australia’s biggest export earner and media reports that suggested the country’s AAA credit rating was at risk.
A local newspaper reported that rating agency Standards and Poor’s could review Australia’s AAA rating should the government fail to realise large cuts to the budget in coming years.
The story was later disputed by an S&P spokesman.
“The Australian dollar may struggle for a while after the recent plunge, but in the longer term it is likely to remain steady,” said Sho Aoyama, senior market analyst at Mizuho Securities in Tokyo. (additional reporting by Shinichi Saoshiro in TOKYO; Editing by Toby Chopra)