January 28, 2013 / 10:01 AM / in 5 years

FOREX-Euro takes a breather from recent rally, yen firm

* Euro falls from 11-month peak vs dollar on profit taking
    * Morgan Stanley recommends investors to buy euro vs Aussie
    * Yen weakness to persist on bets of further monetary easing

    By Anooja Debnath
    LONDON, Jan 28 (Reuters) - The euro slipped from an 11-month
high against the dollar on Monday as investors took profits on
its recent rally, although many were seeking to buy it at lower
levels on growing optimism about a euro zone recovery.
    The euro was flat on the day against the dollar at
$1.3455, not far from the 11-month high of $1.3480 hit last
Friday, with traders citing hedge funds as main sellers.
Chartists said the $1.34 level which acted as a resistance on
the way up would act as support.
    The single currency will face a series of major resistance
levels before $1.35, including its 2012 high of $1.34869 and the
50 percent retracement from the high in May 2011 to the low in
July 2012 at $1.3492.
    "We see some short term limits (in the euro) but there is a
lot of good news priced in ... the risk of a euro zone break up
has fallen to low levels," said Adam Cole, global head of FX
strategy at RBC.
    "Euro/dollar has become a much more opportunistic trade, so
it is not surprising to see it run into some natural limits."
    The euro rallied on Friday after data showed European banks
are repaying more than expected of the loans they borrowed from
the European Central Bank during the debt crisis, indicating
growing confidence. 
    German data also provided evidence that Europe's largest
economy is gathering pace after contracting late last year.
    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. More stimulus usually weighs down on a
currency as it increases its supply. 
    The euro was trading near multi-month highs against the
British pound and the Australian dollar.
    Morgan Stanley in a note recommended investors to buy the
euro against the Australian dollar. It targeted the euro to rise
to A$1.3400, with a stop loss at A$1.2600, expecting more
Japanese investors to buy euro zone assets.  
    The euro rose to a 21-month high of 122.91 yen,
but slipped to trade down 0.4 percent on the day at 121.90 yen.
    The dollar also eased against the yen, but traders and
strategists said the yen would remain weak on expectations
Japan's government will push for aggressive monetary easing.
    The dollar was down 0.2 percent against the yen at 90.70 yen
, with traders citing bids at 90.50 yen which could act as
support. The dollar climbed as far as 91.25 yen, its
highest level since June 2010, before retreating.
    Increasing rhetoric from Japanese authorities that they are
open to the dollar rising to the 95 yen level has helped weaken
the currency further. 
    "It's driven by expectations that Japanese politicians will
try to cheapen the yen like crazy, even though what the BOJ has
been doing is rather incremental," said Ayako Sera, market
economist at Sumitomo Mitsui Trust Bank  
    The yen's steep drop has raised eyebrows abroad and sparked
talk that it is triggering a currency war. But on Saturday,
Japan's economy minister rejected criticism that his country's
extraordinary fiscal and monetary stimulus programme was aimed
at weakening the yen. 
    The yen's weakness also stemmed from a rise in U.S. bond
yields, with which the currency has a close inverse correlation.
The 10-year U.S. bond yield shot up on Friday,
helped by optimism on the global economy.
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