FOREX-Euro rallies versus dollar, yen as ECB meeting awaited
* Euro rises more than 1 percent vs yen
* Euro uptrend seen intact, traders look to buy on dips
* Euro lifted by above-forecast euro zone services PMI
* Yen hits fresh 2-1/2-year high vs dollar
NEW YORK, Feb 5 (Reuters) - The euro rallied strongly against the dollar and yen on Tuesday as better-than-expected euro zone data bolstered expectations the European Central Bank will keep monetary policy steady when it meets this week. The rally in the single currency gained momentum during the New York session as investors positioned for the ECB meeting, pushing the euro's gains against the dollar for the year up to 3 percent. French President Francois Hollande called on the euro zone on Tuesday to protect the currency from "irrational movements," but German Economy Minister Philipp Roesler said countries must focus on boosting competitiveness and not on cutting the value of their currency. The comments did not have an immediate impact on the euro, but served as an indication of the growing split among leaders on the euro's strength, which may check further gains even as investors bought on the upbeat economic data. Instead, the market focus remains the ECB meeting on Thursday. "We think (ECB President Mario) Draghi will be dovish in his comments by stating the ECB's willingness to add liquidity if needed given the reduction in excess reserves that resulted from the early LTRO repayments," said Brian Daingerfield, currency strategist at Royal Bank of Scotland in Stamford, Connecticut. Daingerfield was referring to the repayments to the ECB from banks which took loans out during the financial crisis to backstop their balance sheets. "We think it would be negative to the euro, and therefore, risks a reversal on today's gains," he said. The euro last traded at $1.3576, up 0.5 percent on the session. That put it near the session peak at $1.3597, but still below a near 15-month high of $1.3711 struck on Friday. Chart support was seen at $1.3413, a low hit on Jan. 29. The ECB is unlikely to contemplate an interest rate cut at Thursday's policy meeting despite the euro's sharp rise, but its chief almost certainly faces a grilling afterward over an Italian banking scandal. The euro's strength will need to show significant harm to the economy before the Governing Council reverses course, analysts said, adding there is next to zero chance of that happening at its monthly meeting. The euro zone economy is expected to show it is recovering even as the gulf between its two biggest members, Germany and France, is widening, according to a survey on Tuesday that pegged business optimism in the bloc at an eight-month high.
Euro zone data also indicated the services sector had improved more than expected in January.
Rising risk tolerance also boosted the euro in New York trade when a report showed the U.S. services sector grew in January. "The economy continues its grudging recovery with services following manufacturing after the second-half slump last year," said Joseph Trevisani, chief market strategist at WorldWideMarkets in Woodcliff Lake, New Jersey.
YEN WEAKNESS Meanwhile, Bank of Japan governor Masaaki Shirakawa said he would step down on March 19, three weeks before the official end of his term. He is likely to be replaced with someone who is amenable to Prime Minister Shinzo Abe's drive to ease policy aggressively and end deflation. "The Bank of Japan is about to get a lot more dovish - and sooner than previously thought," said Christopher Vecchio, Currency Analyst at DailyFX in New York. The dollar rose as high as 93.61 yen, its highest since mid-2010. It last traded at 93.53 yen, up 1.3 percent on the day, according to Reuters data. The euro last traded at 126.97 yen, up 1.7 percent on the day, with the session peak of 127.16, the highest since mid-April 2010, using Reuters data. Strategists said further yen weakness could be checked due to growing opposition from other countries before a G20 meeting in Moscow this month. "Japan could face a growing backlash about its recent policies, which have produced a sustained yen weakness; and given that the euro was the currency that appreciated the most, this could mean the Europeans in particular could complain about the loss of international competitiveness," said Valentin Marinov, head of European G10 FX strategy at CitiFX, a division of Citigroup in London.