July 10, 2014 / 1:25 PM / 4 years ago

FOREX-Yen soars as Portuguese bank fears spark safety buying

* Yen hits 5-month high against euro, 2-month high against dollar

* Fears over Portuguese banks create risk aversion

* Fed seen staying dovish, adding to dollar weakness (Adds U.S. dollar moves, changes dateline; previous LONDON)

By Karen Brettell

NEW YORK, July 10 (Reuters) - The yen hit a five-month high against the euro and an almost two month high against the dollar on Thursday, after concerns about Portugal’s largest listed bank and weak Italian economic data hit European shares.

Concerns about the health of a parent company of Banco Espirito Santo bank hurt peripheral euro zone bonds, curbing demand at Greece’s second debt sale following its 2012 default. It was the first significant episode of contagion for peripheral markets this year.

Safety buying sent U.S. Treasuries yields lower and increased demand for the Japanese currency. The yen gained 0.73 percent to 137.56 against the euro, the highest since February 6, and was up 0.50 percent to 101.06 against the dollar , the highest since May 21.

“We’re seeing some problems coming out of Europe,” said Sireen Harajli, a foreign exchange strategist at Mizuho Corporate Bank in New York. “Markets are selling euros and buying safe havens like the Japanese yen.”

The move also came after data showed the steepest drop in Italian industrial output in almost two years.

The dollar gained 0.25 percent against the euro to $1.3611. The greenback also rose 0.17 percent against a broad basket of currencies, according to the dollar index.

The move came after minutes from the Federal Reserve’s June meeting on Wednesday showed a still-dovish central bank and failed to offer any new signals that the Fed is closer to raising interest rates, adding to pressure on the dollar.

“Unless Treasury yields start moving up, to reflect the better data from the United States, it would be a rather frustrating time for dollar bulls,” said Jeremy Stretch, head of currency strategy at CIBC World Markets.

The dollar has struggled to break above relatively tight ranges against the euro and the yen as Treasuries yields stay relatively low, with investors looking for stronger signals that the economy is gaining enough momentum for the Fed to begin raising interest rates.

Kansas Fed President Esther George and Fed Vice Chair Stanley Fischer are both due to speak on Thursday.

Additional reporting by Anirban Nag in London; Editing by Nick Zieminski

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