FOREX-Yen hovers near 31-month low vs dollar before BoJ meeting
* Markets position for aggressive action from Bank of Japan
* U.S. consumer sentiment in January hits lowest in over a year
* China data softer than expected
* Euro hits 20-month high versus Swiss franc
NEW YORK, Jan 18 (Reuters) - The yen dropped for a second straight day against the dollar on Friday, trading within striking distance of a 31-month low as investors position for aggressive action from the Bank of Japan next week. The dollar has gained 3.7 percent in value against the yen so far this year and most strategists believe the U.S. currency is poised to continue appreciating if the BOJ early next week takes steps beyond market expectations in an attempt to stave off deflation. While investors opted to book profits in the euro versus the yen, the single currency shared by 17 counties remained 4.7 percent higher on the year. Concerns about global growth also weighed on the euro after China, the world's second largest economy, reported slowing growth in 2012. The data also weighed on growth-correleted currencies, such as the Australian and New Zealand dollars. Sources familiar with the BOJ's thinking told Reuters the central bank, under relentless pressure from Prime Minister Shinzo Abe, will consider making an open-ended commitment to buy assets until 2 percent inflation is in sight. "This is a big deal," said Jens Nordvig, global head of currency strategy at Nomura Securities in New York. "But as always from a trading perspective, it matters greatly what is already priced," he said. Such a plan would exceed market expectations, which have centered on the BOJ setting a 2 percent inflation target at its two-day meeting that ends on Tuesday and possibly increasing its asset-buying programme. Nomura conducted a survey of clients and the results showed that the inflation target announcement is already widely expected, but those who were surveyed remained uncertain about its asset purchase program. There is a possibility that the BoJ moves to an open-ended commitment on this front, Nordvig said. The dollar hit a high of 90.18 during the global session, its highest since June 2010. It last traded up 0.1 percent at 89.94 yen. Strategists cited chart support at 87.80 yen, the low struck on Wednesday, while reported options barrier at 90.75 yen could act as a near-term resistance. "A lot is priced in for next week's BOJ meeting. If asset purchases by the BOJ were unlimited that could lead to significantly higher levels in dollar/yen and euro/yen levels," said Peter Kinsella, currency strategist at Commerzbank. "Levels past 93-95 yen within the next 2-3 weeks is not unreasonable." Traders reported strong demand for options betting on further yen weakness, with one-month dollar/yen implied volatility -- a measure of expected price movement -- rising to its highest since August 2011. One-month risk reversals showed demand to buy yen puts, or bets on the yen falling, also rose. But some analysts said the BOJ could undershoot expectations and this could see the yen rebound. The dollar could gain over the next month due to its status as a safe-haven as U.S. politicians debate how to raise the country's borrowing limit, the so-called debt ceiling. U.S. consumer sentiment deteriorated for a second straight month to hit its lowest in over a year in January, with a record number of consumers citing the recent "fiscal cliff" debate in Washington, a survey released on Friday showed.
EURO SLIPS The euro last traded 0.3 percent lower against the yen at 119.78 yen, down from 120.70 hit earlier - its highest since May 2011. The euro was also down against the dollar, falling 0.3 percent on the day to $1.3328. It had earlier hit $1.3401, just shy of a 11-month high of $1.3403 set on Monday. The could remain under pressure if concerns about global growth continue. China's economy grew at its slowest pace in 13 years in 2012, though a year-end spurt supported by infrastructure spending and a jump in trade signalled the foundation for the stable growth path Beijing says is vital for economic reform may be in sight.
Easing concerns about the crisis in the euro zone and European Central Bank President Mario Draghi's upbeat comments last week have encouraged some investors to take on riskier trades. This has helped boost the euro and pushed down the Swiss franc, a preferred refuge in times of financial stress. "Draghi's comments that he expected a recovery in the euro zone in 2013 surprised markets and helped move the euro higher against the dollar and especially against the Swiss franc," Credit Suisse's Berg said. He expects the euro to hit $1.35 over the next few weeks, after which it would likely consolidate around those levels. It climbed to a 20-month high against the Swiss franc of 1.2568 francs, with analysts expecting the Swiss currency to remain weak.