Euro hits record high vs yen on rates

By Naomi Tajitsu

TOKYO, Aug 21 (Reuters) - The euro gained broadly on Monday, clawing up to another record high against the yen on expectations the European Central Bank will keep raising interest rates.

With the market fixated on rates, analysts said that the single European currency was the clear favourite among traders given that the ECB is forecast to tighten credit further after bumping rates up to 3 percent earlier this month. "When you think about which currency is easiest to buy, dollar rates look as if they have stalled, while yen rates are not going to rise any time soon," said Nobuo Ibaraki, forex manager at Nomura Trust and Banking.

"That leaves the euro the clear winner."

The Federal Reserve is seen keeping rates at 5.25 percent in September, which would mark its second straight pause.

The Fed stopped raising rates this month due to cooling inflation risks and a slowdown in the U.S. economy after tightening at 17 consecutive policy meetings over two years.

The yen has fallen out of favour as the Bank of Japan has stressed that it will take its time raising rates after lifting them to 0.25 percent last month, its first rise in six years.

Against the dollar, the euro climbed to $1.2870 by 0520 GMT, up roughly 0.4 percent on the day and in sight of a two-and-a-half month high above $1.2913.

Traders said that the euro's gains had been driven by stop-loss orders triggered around $1.2840-1.2850.

That helped to push the euro to 149.07 yen on electronic trading board EBS, the single currency's highest level since it was launched in 1999. It was around 148.50 yen in late U.S. trade on Friday.

The dollar inched down to 115.65 yen from 115.80 yen.

The U.S. currency stayed on the back foot after the University of Michigan's index of consumer sentiment on Friday dropped in August from a month earlier, indicating that the economy is slowing even as inflation expectations climbed.

CHINA CHIMES IN

Even though traders expect the Fed to keep rates unchanged next month, they will be on the lookout for any climb in prices, particularly given that Friday's index data showed a significant pick-up in inflation expectations.

Dealers expected currencies to move in the narrow ranges that have dominated the market in past months, particularly given a light schedule of economic data this week.

Barring any big surprises, U.S. housing and Japanese consumer price figures due this week, as well as a speech by Fed Chairman Ben Bernanke on Friday, are expected to have little impact on the market.

An interest rate rise by China on Friday increased expectations that the central bank would allow for a stronger yuan, boosting the Chinese currency to 7.9680 against the dollar on Monday -- up from the previous close of 7.9745.

The rate announcement pushed the yuan closer to the 7.9650 marked earlier this month, its highest level since the yuan was revalued in July last year.

China's rate hike provided some impetus for the yen to appreciate on Friday, traders said, but had little effect on Monday.

"In the long-term, the rate increase is unlikely to boost the yen sharply higher against the dollar as the market considers the future paths of monetary policy in the United States and Japan more important issues for the pair," said Masafumi Yamamoto, currency strategist at Nikko Citigroup.

The yen is often seen as the proxy for the yuan, which has limited liquidity.

Easy-Forex? The best trading platform available today.

ForexProfiteer.com - Learn to trade the Forex with our Simple Day trading strategy.