* Euro hits 6-week high vs yen, dollar/yen at 5-week high
* Merkel comments in support of ECB help euro
* Australian dollar drops to 3-week low vs USD
By Jessica Mortimer
LONDON, Aug 17 (Reuters) - The euro struck a six-week high against the yen on Friday after German Chancellor Angela Merkel boosted expectations that the European Central Bank will take bold steps to stem the common currency bloc’s debt crisis.
The dollar also rose to a five-week high versus the yen, buoyed by a recent rise in U.S. government bond yields in the wake of firmer economic data and as a greater appetite for riskier assets hurt the safe-haven Japanese currency.
Merkel said on Thursday that last month’s declaration by European Central Bank President Mario Draghi that he would do whatever it takes to preserve the euro were “completely in line” with the approach taken by European leaders.
Her comments soothed concerns about disagreements among euro zone leaders on how to tackle the crisis and are likely to provide support to the euro in the near term. The euro has held well above a recent two-year low against the dollar, supported by speculation the ECB would buy Spanish and Italian bonds next month to lower the two countries’ borrowing costs.
The euro rose 0.3 percent to 98.40 yen on the EBS trading platform, its strongest since early July, extending gains after it broke above its 55-day moving average of 97.997.
The single currency was slightly firmer on the day at $1.2355, having earlier risen to $1.2382. Bids are cited below $1.2340 offering it some support while further gains could take it towards last Monday’s peak of $1.2444.
Analysts said concerns about the euro zone debt crisis and a weakening economy were likely to make investors wary of pushing the euro out of its recent trading range.
“The Merkel comments were supportive for the euro in that they were consistent with the ECB, though this was tempered by the fact that the main opposition to bond-buying comes from the Bundesbank (Germany’s central bank), not the government,” said Adam Cole, global head of currency strategy at RBC in London.
A Reuters poll on Thursday showed economists expect the ECB to begin buying Italian and Spanish bonds in September, and to cut its main refinancing rate to a record low of 0.5 percent.
The dollar rose 0.2 percent to 79.498 yen, its strongest since mid-July. Traders said it could extend gains if it breaks above stop-loss buy orders at 79.50, potentially targeting its 100-day moving average at around 79.65 yen.
Surprisingly strong U.S. retail sales figures earlier this week and other firmer data since have dampened expectations the Fed will launch another round of bond-buying, or quantitative easing, as early as September, and lifted U.S. Treasury yields.
The strong relationship between the performance of the dollar against the yen and yield spreads between U.S. and Japanese government bonds could see the dollar add to its gains if U.S. yields rise further.
Indeed, the dollar is on track for its best weekly performance against the yen since late June.
“As a result of the increasing upward momentum and the low level of positioning -- the Morgan Stanley position tracker shows dollar/yen positions as flat -- we expect the recovery to be extended further and have raised the stop on our long position to 78.40 yen,” strategists at Morgan Stanley said in a note. The bank is targeting the dollar to rise to 82 yen.
But some analysts warned the U.S. economic recovery remained shaky and this could limit the scope for sustained gains in U.S. bond yields.
The dollar index, which measures the dollar against a basket of currencies, rose 0.1 percent to 82.457, though it stayed below a two-week high of 82.881 set on Thursday.
The Australian dollar fell to a three-week low against the U.S. dollar and the euro as traders trimmed long positions in the high-yielding currency, concerned that its recent rise may have been overdone.
It was last down 0.8 percent at US$1.0425.
“There is a growing body of opinion that the Australian dollar’s overvaluation is much more of an issue domestically than it was previously,” said RBC’s Cole.