SYDNEY The yen plumbed five-month lows on the euro and a two-month trough on the dollar on Friday as investors grew confident the Bank of Japan would ease further next week, making the yen more attractive as a funding currency for carry trades.
A slew of reports quoting sources saying the central bank would consider taking action at its October 30 policy meeting encouraged speculators to trim long yen positions.
That lifted the euro to 104.15 yen, a gain of 2 percent for the week, while the dollar bought 79.31 yen, not far off a peak of 79.47 set Thursday.
The dollar index .DXY bounced off a one-month low against a basket of major currencies as the euro backtracked to $1.3072, from Thursday's high around $1.3129.
The dip was a small setback for the common currency which had looked set to retest last month's peak of $1.3173. A break there would take it to highs not seen since early May.
"Our survey of EUR/USD positioning suggests a market betting on a wide range trading environment strategically, while tactically looking to sell EUR/USD on rallies," Societe Generale strategist Sebastien Galy wrote in a client note.
"Looking at the strategic supply and demand of EUR/USD, the market should break down above 1.35 and below 1.10."
The generally firmer greenback also saw the Australian dollar fall to $1.0372, from a near three-week peak of $1.0412.
Sentiment had been briefly shaken on Thursday after earnings from Google (GOOG.O) fell well short of expectations. Adding to the drama, the results were prematurely released during the trading session and caused Google stocks to plummet some 9 percent before a trading halt was triggered.
That gave the forex market an excuse to take profits in the euro and commodity currencies that have rallied this week on talk of a credit line for Spain and on Moody's decision to maintain the country's investment grade rating for now.
Thursday's batch of Chinese data, which offered hopes the slowdown in the world's second biggest economy was stabilizing, and a successful bond sale in Spain had little lasting impact on markets.
Still, the euro was on track to end the week up nearly 1 percent against the dollar and almost 2 percent higher on the yen.
The Aussie dollar was also looked set to finish the trading week boasting gains of over 1 percent versus the greenback and more than 2 percent against the yen.
The market's immediate attention is on the outcome of a summit of euro zone leaders. A French source told Reuters a deal had been agreed on a legal framework for a banking union which would allow the direct recapitalization of banks early next year.
The text of draft conclusions of the summit said European Union leaders have agreed to complete the legal work on setting up a single bank supervisor for financial institutions in the euro zone by the end of the year. Implementation of the plan would be gradual over 2013.
(Editing by Wayne Cole)