* Euro off recent peaks before ECB rate decision
* Portugal's aid request unlikely to change ECB rate hike
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* Yen faces long-term slide but correction risks imminent
By Natsuko Waki
TOKYO, April 7 (Reuters) - The euro held below the previous
day's 11-month high against the yen and 14-month peak versus the
dollar as investors focused on how much room the European
Central Bank has for raising interest rates beyond a widely
expected tightening later in the day.
The yen remained near a six-month trough against the dollar.
The Bank of Japan is expected to keep monetary policy on hold
but signal its readiness to ease policy further, bucking a
global trend of central banks withdrawing excess liquidity put
in place during the financial crisis.
More tightening signals anticipated from the European
Central Bank helped to offset concerns about euro zone debt
after a Portuguese request for European financial aid, but many
believe the single currency is overdue for a correction after a
recent rally.
"The market ignored Portugal's request for aid because it
was seen unlikely to stop the ECB from raising interest rates.
But the key is how much they are going to raise going forward,"
said Teppei Ino, an analyst at bank of Tokyo-Mitsubishi UFJ.
The euro was down 0.1 percent at $1.4310 , having
risen to $1.4350, its highest since late January 2010, on
Wednesday.
The break of $1.4282 has seen the euro progress towards a
major 76.4 percent retracement at $1.4375 but a failure to rise
strongly beyond there could open the way for a move back to
around $1.4160. Near-term support is seen in the $1.4285-1.4250
area.
The dollar stood at 85.34 yen , having risen as high
as 85.54, almost 10 yen above its record low of 76.25 yen hit in
March, days after northeast Japan's devastating earthquake.
Resistance around the November high of 85.94 yen is
hindering the dollar's further advance. The area around 85.40 to
85.95 includes a 50 percent retracement of the decline from the
May peak, as well as a downtrend line from the 2007 cycle high.
The euro rose as high as 122.55 yen , just ticks
away from the previous day's 11-month peak.
The yield spread between two-year euro zone and Japanese
government bonds rose to 164.6 basis
points, its highest since December 2008.
The yen is expected to face long-term downward pressure from
low interest rates and an expected decline in Japan's trade
surplus as the country imports to rebuild the quake-hit region.
EURO AND ECB
The ECB is set to raise its benchmark rate by 25 basis
points for the first time since July 2008. Many analysts say ECB
President Jean-Claude Trichet must sound hawkish enough to keep
alive expectations for around 100 basis points in rate hikes
expected by November and for the euro to achieve fresh gains.
Another concern for the euro is the region's persistent debt
crisis. Portugal became the third euro zone member to seek a
bailout from the European Union, with the size of the package
expected to be around 60 billion to 80 billion euros ($85-114
billion).[]
Higher euro zone interest rates would likely make it
difficult for debt-laden peripheral countries to finance their
deficits, by raising already high borrowing costs.
On the other hand, higher oil prices are expected to support
the euro as resource-rich countries convert part of their dollar
revenues into the single currency for diversification.
Brent crude oil prices rose to a 2-1/2 year high above $123
a barrel on Wednesday <LCOc1> while the Reuters-Jefferies CRB
index , a global commodities benchmark, hit a one-month
high on Wednesday.
In Asia, where central banks are stepping up intervention,
euro demand from authorities which are also diversifying their
reserves is likely to offer the single currency a solid floor.
The expectation for higher euro zone rates contrasted with
uncertainty in the United States over when the Federal Reserve
may begin to tighten policy. The U.S. economy remains too
fragile for the Fed to begin raising rates, Atlanta Fed
President Dennis Lockhart said on Wednesday [].
The dollar was up 0.1 percent at 75.613 against a
basket of currencies.
The Australian dollar scaled a fresh 29-year peak against
the dollar of $1.0481 and rose to 89.45 yen ,
its highest since September 2008, after data showed the economy
added a higher-than-expected 37,800 jobs in March.
[]
($1 = 0.703 Euros)
(Additional reporting by Masayuki Kitano and Reuters FX analyst
Krishna Kumar; Editing by Edmund Klamann)
