FOREX-Yen drops vs dlr to near 31-month low on BoJ bond-buying bets
* Markets positions for aggressive Bank of Japan action
* Yen to move higher if Bank of Japan seeks unlimited bond buying
* U.S. consumer sentiment in January hits lowest in over a year
* China data softer than expected
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 positioned for expected aggressive policy action from the Bank of Japan next week. While investors opted to book profits in the euro versus the yen, the currency shared by 17 counties remained 4.4 percent higher on the year, the strongest performance of major currency pairs. The dollar has gained 3.7 percent 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 reverse a deflationary spiral. Concerns about global growth weighed on risk appetite after China, the world's second-largest economy, reported slowing growth in 2012. Currencies correlated to global growth, such as the Australian and New Zealand dollars, fell on the data. 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. 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 program. "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. Nomura recently conducted a survey 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. Nomura has become more neutral on the yen after the big price move already seen. The dollar and euro's impressive appreciation against the yen in 2013 follows gains of about 11.3 percent and roughly 14.3 percent, respectively, in the fourth quarter. 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 87.77 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 against the euro and riskier currencies 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, or 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 FALLS AS RISK APPETITE ABATES The euro zone's economic backdrop remains dismal and should data out of the region continue to show weakness, the European Central Bank may opt to cut rates in the coming months, a negative for the euro. Global growth concerns could also sap demand for the euro. 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 signaled that the foundation for the stable growth path Beijing says is vital for economic reform may be in sight.
The euro last traded 0.6 percent lower against the yen at 119.48 yen, down from 120.70 hit earlier - its highest since May 2011. The euro earlier in the global session climbed to a 20-month high against the Swiss franc of 1.2568 francs, with analysts expecting the Swiss currency to remain weak. It last traded down 0.4 percent at 1.2424 francs. Against the dollar, the euro retreated from $1.3401, just shy of an 11-month high of $1.3403 set on Monday. It last traded at $1.3284, down 0.7 percent on the day, according to Reuters data.