FOREX-Yen out in the cold as year-end optimism lifts stocks

December 27, 2013

* Yen falls to fresh five-year lows vs USD & euro

* Record (LSE: REC.L - news) -closing high on Wall Street weighs on low-yielding yen

* Higher U.S. Treasury yields also help underpin USD

By Ian Chua and Hideyuki Sano

SYDNEY/TOKYO, Dec 27 (Reuters) - The yen wallowed at five-year troughs against the dollar and euro on Friday, having fallen prey to a renewed appetite for risk which lifted Wall Street to record highs and weighed on the low yielding currency.

The Japanese currency is on course to post its ninth consecutive week of falls against the dollar, the longest such period since 1974, when the country was suffering from the aftermath of the oil crisis that started the previous year.

"The momentum is so strong. In a way the market seems a bit overheated but it is likely to continue after a relief that the Fed's tapering of stimulus did not cause a shock in global financial markets," said Minori Uchida, chief FX strategist at Bank of Tokyo Mitsubishi UFJ.

The dollar rose to as high as 105.05 yen before retreating to 104.86 yen, while the euro rose to 143.915 yen -- highs not seen since October 2008.

The yen's decline came in thin year-end trade and was a continuation of a well entrenched trend after Japanese authorities this year launched a shock-and-awe stimulus strategy to snap the economy out of years of deflation.

"USD/JPY continues to move towards my long held year-end target of 105.00 and is clearly getting a helping hand by the fact that the U.S. 10-year treasury is at 2.99 percent and testing the September high of 3 percent," said Chris Weston, chief market strategist at IG (LSE: IGG.L - news) in Melbourne.

"The ever increasing premium the U.S. 10-year treasury commands against other developed market bonds is clearly increasing the USD's appeal."

Yields on Japanese government 10-year bonds are at just 71 basis points.

Treasury yields could rise further in 2014 if the Federal Reserve continues to scale back its bond-buying programme, having last week taken the first step towards winding down its massive stimulus plan.

On Friday, data showed Japan's November core inflation rate rose 1.2 percent from a year earlier, the highest reading in five years, as the yen's steep fall boosted import prices.

Retail sales in November also rose 4.0 percent from a year earlier, the largest gain since April 2012, led by strong auto sales.

Many economists expect inflation to peak soon, however, forcing the Bank of Japan to take additional easing steps early next year, as the economy is likely to face headwind from a sales tax hike in April.

Against the dollar, the euro gained 0.4 percent to $1.3740 , maintaining its moderate uptrend this week.

It has risen more than seven percent from a low hit in July, as the euro zone economy came out of a recession triggered by its debt crisis.

The European Central Bank has not been expanding its balance sheet actively unlike its U.S. and Japanese counterpart, giving an additional boost to the euro.

The greenback also advanced against dollar-bloc commodity currencies such as the Australian dollar, but fell on sterling after strong British mortgage data reinforced expectations the Bank of England may raise interest rates sooner than expected.

Sterling popped up to a 1-1/2-week high of $1.6438 on Thursday and last stood at $1.6424.

The Australian dollar slipped 0.2 percent to $0.8880 , near a three-year low of $0.8820.