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Euro hits record high vs yen, dlr dips before data

LONDON - The euro hit a record high versus the yen on Thursday on expectations euro zone finance ministers are unlikely to complain about the currency’s strength, while the dollar dipped ahead of a US services sector survey.

Sources close to the Eurogroup told Reuters on Wednesday that ministers are likely to stay calm on the euro’s strength when they gather for regular talks in Brussels on Monday.

Recent upbeat data from the euro zone has reinforced expectations for a June interest rate hike from the current 3.75 percent and perhaps more later this year.

Meanwhile, strong appetite for risk led to continued yen weakness as investors exploit the carry trade, borrowing cheaply in low yielding assets like the yen to fund purchases of higher yielding assets, analysts said.

With Tokyo markets shut for a holiday and investors keenly awaiting US service sector data later on Thursday and jobs data on Friday, trading on Thursday was quiet.

”Risky assets are generally outperforming and equity markets are doing well so it looks like investors are comfortable shifting to short yen positions,” said Adam Cole, senior currency strategist at RBC Capital Markets.

By 1045 GMT, the euro was up slightly on the day, having risen as high as 163.62 yen earlier in the session, bringing its gains since January to more than 4 percent.

The euro was up 0.15 percent versus the dollar at $1.3607, having hit a historic high of $1.3682 last week.

The dollar was steady on the day at 120.09 yen, after hitting a two-month high on Wednesday.

Risk appetite still healthy

Japan has the lowest interest rates in the industrialised world at 0.5 percent, and investors expect euro zone interest rates to rise from 3.75 percent currently.

”We’re forecasting 4.25 percent by the end of the year. With the US likely having to cut, the euro can quite easily go to $1.40 by the end of the year,” said Adam Myers, currency strategist at UBS.

The European Commission said on Thursday that in real effective exchange rate terms, the euro was now “just above” its long term level.

Broadly speaking, investors are still happy to borrow in low-yielding yen to buy riskier assets, including equities, and fund carry trades.

The Dow Jones industrial average hit a record high on Wednesday while the S&P 500 reached a six-year peak. Share markets in Europe and most of Asia also rallied.

“Global economic growth is strong, if not actually accelerating again, so it’s no surprise that the appetite for risk is still healthy,” said John Kyriakopoulos, a currency strategist at nabCapital in Sydney.

On the US data front Thursday, the Institute for Supply Management’s (ISM) measure on services sector activity is seen edging up to 53.0 in April from 52.4 in March. Analysts will pay close attention to the employment indicator to see if weakness in the US housing sector is seeping into job losses.

The weekly jobless claims is also due, ahead of Friday’s closely-watched payrolls report for April, which economists expect to show an increase of 100,000 jobs.

Investors still expect one rate cut from the Federal Reserve this year, which would take rates down to 5 percent.