January 25, 2013 / 9:31 PM / 5 years ago

FOREX-Euro gains as bank fears ease; yen continues slide vs dollar

* Euro zone banks to repay more ECB loans than expected
    * German business confidence data fuels demand for euro
    * Yen weakness continues; Japan defends yen policy

    By Wanfeng Zhou
    NEW YORK, Jan 25 (Reuters) - The euro rallied broadly on
Friday on growing optimism the region's debt crisis has turned
the corner, while the yen was headed for its 11th consecutive
week of losses against the dollar.
    The euro zone common currency hit an 11-month high versus
the dollar and a 21-month peak versus the yen after the European
Central Bank said banks would pay back a greater-than-expected
137 billion euros in loans next week, a sign that at least parts
of the financial system are on the mend.
    "For now, the trade of 'buy euro, sell yen' seems to be in
play," said Win Thin, senior currency strategist at Brown
Brothers Harriman in New York.
    The euro climbed 0.6 percent to $1.3453, after rising
to $1.3479, its highest level since late last February. For the
week, it gained about 1.2 percent.
    A survey showing improvement in business confidence in
Germany underpinned the euro strength.
    Camilla Sutton, chief currency strategist at Scotiabank in
Toronto said the euro is rapidly approaching three major
resistance levels. She cited this year's high of $1.3486, the 50
percent retracement from the high in May 2011 to the low in July
2012 at $1.3492, and the psychologically-important $1.3500
figure, all of which are within reach.  
    But Sutton cautioned, "We would not position too early for
the downside and would instead trade with the trend until it
    The ECB is the first major central bank to start moving away
from unconventional monetary policy measures, unlike the U.S.
Federal Reserve and Bank of Japan, which are buying bonds to
stimulate growth.
    When a central banks purchases assets, effectively expanding
its balance sheet, the country's currency  tends to be hurt
because it increases the currency's supply.
    Reflecting a dramatic improvement in the euro zone's funding
conditions, the cross currency basis swap, or the relative
premium for swapping euro Libor for dollar Libor, on Friday
traded at -17.5 basis points on three-month contracts
, the lowest premium in 20 months.
    A lower swap premium suggests fewer demand for the greenback
and diminished funding stress in the euro zone.
    Two-year German bond yields jumped to their highest since
March 2012 and rose above their U.S. counterparts for the first
time in two years, suggesting interest-rate differential is
moving in favor of the euro, analysts said.
    In the options market, traders reported demand for euro
calls, which are bets on more gains, although one-month risk
reversals on Friday still showed a minor bias for
puts or more euro weakness. However, this was the smallest euro
put level since November 2009.  
    The dollar rose as high as 91.19 yen, the strongest
since June, 2010, rising past reported options barrier at 90.75
and 91 yen. It was last up 0.6 percent at 90.88 yen.
    On the week, the dollar rose about 1 percent versus the yen,
and has gained every week versus the yen since the week ended
Nov. 11.
    Expectations that Japan's new prime minister, Shinzo Abe,
will force the central bank to aggressive ease monetary policy
has caused the yen to lose more than 10 percent of its value
against the dollar since mid-November, and many expect more
    Japan's core consumer prices slipped for a second straight
month in the year to December, signaling the economy was still
in deflation and piling more pressure on the central bank to
adopt more stimulus steps to achieve its new inflation target.
    The yen's steep drop has raised eyebrows abroad, with German
Chancellor Angela Merkel singling out Japan on Thursday as a
source of worry. But Japanese Finance Minister Taro Aso said
Friday that monetary easing was aimed at pulling the country out
of deflation, not manipulating currencies. 
    BNP Paribas in a note said the yen's downside momentum
remained strong, but the back-and-forth statements about the
currency's weakness between foreign politicians and Japanese
officials should exacerbate volatility.
    The euro rose 1.3 percent to 122.40 yen putting it
on track for a weekly rise of 2 percent, the seventh straight
week of gains. It had earlier touched 122.77, its highest level
since mid-April 2011.
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