* BOJ's Kuroda comments drive yen to highs
* Euro pegged back ahead of European election
* Sterling index at 5-1/2 year high after BoE minutes, UK
(adds quote, options trading)
By Anirban Nag
LONDON, May 21 The yen rose to a 3-1/2 month
high against a struggling dollar and 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.
The biggest volumes though were seen in the pound, which
rose to a 5-1/2 year high against a basket of currencies,
after a surge in retail sales last month and signs some Bank of
England policymakers are leaning towards a rate hike.
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 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. All of
which meant the yen was likely to be supported in the near term.
"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.
In the options market, one-month dollar/yen implied
volatility - or the expected price swing - rose to its
highest in three weeks, highlighting expectations that the pair
is likely to see a new trading range in coming weeks.
EURO STUMBLES, STERLING SURGES
The euro fell to 138.23 yen, its lowest since
early February and down 0.4 percent on the day.
The euro also slid to a 16-month low against the British
pound of 81.03 pence, with the single currency under
broad pressure on expectations the European Central Bank will
ease monetary policy next month.
It failed to get a boost from a subdued dollar, trading
lower on the day at $1.3692. 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 market is definitely on a "wait and see" mode, ahead of
ECB meeting and the outcome of EU elections. I am still
moderately bearish on the euro, with a short term target just
above $1.3650," said Francesco Scotto, portfolio manager at RTFX
(Editing by Toby Chopra)