February 5, 2013 / 9:20 PM / in 5 years

FOREX-Euro rallies versus dollar, yen as ECB meeting awaited

* Euro rises more than 1 percent vs yen
    * Euro uptrend seen intact, traders look to buy on dips
    * Euro lifted by above-forecast euro zone services PMI
    * Yen hits fresh 2-1/2-year high vs dollar

    NEW YORK, Feb 5 (Reuters) - The euro rallied strongly
against the dollar and yen on Tuesday as better-than-expected
euro zone data bolstered expectations the European Central Bank
will keep monetary policy steady when it meets this week.
    The rally in the single currency gained momentum during the
New York session as investors positioned for the ECB meeting,
pushing the euro's gains against the dollar for the year up to 3
    French President Francois Hollande called on the euro zone
on Tuesday to protect the currency from "irrational movements,"
but German Economy Minister Philipp Roesler said countries must
focus on boosting competitiveness and not on cutting the value
of their currency. 
    The comments did not have an immediate impact on the euro,
but served as an indication of the growing split among leaders
on the euro's strength, which may check further gains even as
investors bought on the upbeat economic data.
    Instead, the market focus remains the ECB meeting on
    "We think (ECB President Mario) Draghi will be dovish in his
comments by stating the ECB's willingness to add liquidity if
needed given the reduction in excess reserves that resulted from
the early LTRO repayments," said Brian Daingerfield, currency
strategist at Royal Bank of Scotland in Stamford, Connecticut.
    Daingerfield was referring to the repayments to the ECB from
banks which took loans out during the financial crisis to
backstop their balance sheets. 
    "We think it would be negative to the euro, and therefore,
risks a reversal on today's gains," he said.
    The euro last traded at $1.3576, up 0.5 percent on the
session. That put it near the session peak at $1.3597, but still
below a near 15-month high of $1.3711 struck on Friday. Chart
support was seen at $1.3413, a low hit on Jan. 29.
    The ECB is unlikely to contemplate an interest rate cut at
Thursday's policy meeting despite the euro's sharp rise, but its
chief almost certainly faces a grilling afterward over an
Italian banking scandal. 
    The euro's strength will need to show significant harm to
the economy before the Governing Council reverses course,
analysts said, adding there is next to zero chance of that
happening at its monthly meeting.  
    The euro zone economy is expected to show it is recovering
even as the gulf between its two biggest members, Germany and
France, is widening, according to a survey on Tuesday that
pegged business optimism in the bloc at an eight-month high.
    Euro zone data also indicated the services sector had
improved more than expected in January. 
    Rising risk tolerance also boosted the euro in New York
trade when a report showed the U.S. services sector grew in
    "The economy continues its grudging recovery with services
following manufacturing after the second-half slump last year,"
said Joseph Trevisani, chief market strategist at
WorldWideMarkets in Woodcliff Lake, New Jersey.

    Meanwhile, Bank of Japan governor Masaaki Shirakawa said he
would step down on March 19, three weeks before the official end
of his term. He is likely to be replaced with someone who is
amenable to Prime Minister Shinzo Abe's drive to ease policy
aggressively and end deflation. 
    "The Bank of Japan is about to get a lot more dovish - and
sooner than previously thought," said Christopher Vecchio,
Currency Analyst at DailyFX in New York.
    The dollar rose as high as 93.61 yen, its highest since
mid-2010. It last traded at 93.53 yen, up 1.3 percent on
the day, according to Reuters data.
    The euro last traded at 126.97 yen, up 1.7 percent
on the day, with the session peak of 127.16, the highest since
mid-April 2010, using Reuters data. 
    Strategists said further yen weakness could be checked due
to growing opposition from other countries before a G20 meeting
in Moscow this month. 
    "Japan could face a growing backlash about its recent
policies, which have produced a sustained yen weakness; and
given that the euro was the currency that appreciated the most,
this could mean the Europeans in particular could complain about
the loss of international competitiveness," said Valentin
Marinov, head of European G10 FX strategy at CitiFX, a division
of Citigroup in London.
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