* Dollar/yen crawls towards 7-mth low of 86.96
* Euro/dollar breaks above Ichimoku cloud
* $1.3125 retracement level may be one target for euro
* Kiwi slips after weaker-than-expected inflation data
By Rika Otsuka
TOKYO, July 16 (Reuters) - The dollar weakened on Friday,
crawling towards a seven-month trough against the yen after a
series of U.S. data this week underscored a slackening in the
economy's recovery.
Market players closely watched whether the dollar could hold
above its July 1 low of 86.96, its lowest since early December,
as a fall below that level could boost the possibility of the
greenback dropping to 84.82 yen, a 14-year low reached last
November.
Last December the Bank of Japan called an emergency meeting
soon after the dollar slid to the 14-year tough, and decided to
pump 10 trillion yen ($114.5 billion) in three-month funds into
the banking system.
The yen's latest rise has brought it to levels that could
cause pain to Japanese exporters if its gains are sustained,
with the BOJ's tankan survey showing the average forecast for
the dollar/yen rate in the year to next March among large
manufacturers is 90.18 yen.
Market players said there was talk of stop-loss dollar
offers at levels below 87.00 yen.
The dollar slid 0.5 percent to 87.02 yen <JPY=> after
falling as low as 86.97 yen. Some speculative players who are
betting further losses in the greenback would be limited against
the yen bought back dollars below 87.00 yen, traders said.
U.S. data this week, including retail sales and producer
price numbers have been soft, raising questions about the
sustainability of a U.S. recovery. [].
The euro hovered near a two-month peak of $1.2955 hit on
trading platform EBS on Thursday, when it jumped 1.6 percent
against the greenback.
Traders said investors were shifting funds away from the
dollar and towards the euro due to a combination of factors
including receding concerns about sovereign debt problems in the
euro zone, worries about a U.S. recovery and strong U.S.
earnings results. Lower U.S Treasury yields also undermined the
greenback. [].
"Given the dollar's weakness, it won't be surprising to see
the euro rising to $1.3000, although the euro could tread water
in the near-term after yesterday's sharp rally," said Minoru
Shioiri, chief manager of forex trading at Mitsubishi UFJ Morgan
Stanley Securities.
The euro dipped 0.2 percent to $1.2916, giving back some of
its 1.6 percent gain from Thursday, when it scaled a two-month
high of $1.2955 on trading platform EBS.
Thursday's rally lifted the euro above the daily Ichimoku
cloud, meaning it has broken through a major resistance zone and
may have more room to rise. In another positive sign, the euro
rose above its 100-day moving average on Thursday for the first
time since December.
One possible upside target is $1.3125, a 38.2 percent
Fibonacci retracement of the euro's drop from November to June.
EURO'S RISE MAY SLOW
Although technical charts suggest the euro is still trending
higher, there were some indications that its rise may lose steam
for now.
A senior trader for a major Japanese bank said many euro
option barriers were likely to lie at levels near $1.3000,
adding that the pace of the euro's rise may slow in the
near-term.
The euro's 14-day relative strength index (RSI) rose above
70 on Thursday, showing that the euro had entered overbought
territory. That was also the highest since September 2009. The
euro's RSI was near 68 on Friday, still near overbought
territory.
Earlier this week, minutes of the Federal Reserve's latest
meeting revealed policymakers may need to do more to boost the
economy if a sputtering recovery slows further.
That was in sharp contrast to the euro's fortunes. The
single currency has risen more than 8 percent after smooth
government debt auctions in Greece, Portugal and Spain eased
concerns about the euro zone's sovereign debt problems.
The dollar index dipped 0.1 percent to 82.443 <.DXY>.
Earlier this month the dollar index broke below the daily
Ichimoku cloud, suggesting more losses may be in store.
The New Zealand dollar dropped after inflation data was
weaker than expectations. [].
The kiwi fell 1 percent on the day to $0.7201, having stood
at around $0.7270 before the data.
(Additional reporting by Anirban Nag and FX analyst Krishna
Kumar in Sydney, FX analyst Rick Lloyd in Singapore, and
Hideyuki Sano and Rika Otsuka in Tokyo; Editing by Joseph
Radford)
