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FOREX-Dollar on defensive, hits fresh 2-year low vs euro

Lisa Twaronite and Masayuki Kitano
Friday, 25 Oct 2013 | 12:52 AM ET

* Euro hits fresh 2-year high

* Dollar index sets fresh 8-1/2-month low

TOKYO/SINGAPORE, Oct 25 (Reuters) - The dollar set a fresh two-year low versus the euro on Friday, pressured by strengthened expectations the U.S. Federal Reserve will maintain its asset purchases through early next year.

The dollar also set a fresh 8-1/2-month low versus a basket of currencies and slipped to a two-week low against the yen.

The euro edged up 0.2 percent to $1.3825 and rose to as high as $1.3833, its highest level since November 2011.

The single currency shrugged off data the previous day showing the pace of growth in euro zone business unexpectedly eased this month as global data suggested the recovery remains fragile elsewhere as well, with U.S. manufacturing output dropping for the first time in four years.

While there is some caution about the euro's outlook in the wake of its recent gains, the single currency will probably stay firm over the next few months, said Teppei Ino, an analyst for the Bank of Tokyo-Mitsubishi UFJ in Singapore.

"I think everybody is wondering whether it is really heading toward $1.40," Ino said.

Still, the euro seems likely to be supported over the next few months, given the backdrop of dollar weakness, he said.

"If the time frame that you're looking at is the rest of this year, it's hard to say that the euro will be weak," Ino said.

In the near term, the euro could take its cues from the German Ifo survey due on Friday.

The dollar index, which measures the greenback's value against a basket of currencies, touched an 8-1/2-month low of 78.998.

The dollar index is down about 0.8 percent for the week, having come under pressure after a disappointing U.S. jobs report vanquished any hope that the Fed would taper its stimulus this year.

Against the yen, the dollar set a two-week low of 96.94 yen and last stood at 97.00 yen, down 0.3 percent on the day.

Although the expectations for the Fed to keep its massive bond-buying stimulus for longer tend to boost risk appetite and hurt the safe haven yen, the dollar has struggled versus the yen this week as U.S. bond yields have fallen, eroding the greenback's yield attraction.

But with the 10-year Japanese government bond yield wallowing at even lower levels and having slipped below 0.60 percent on Thursday for the first time since May 9, a focus is whether Japanese investors will step up their overseas investments.

"As the JPY weakening trend strengthened over the past year, the main JPY sellers have been foreign investors, especially hedge funds," said Citi forex strategists in a research note.

These early bets that Japanese investors would increase overseas investments failed to materialise, as Japanese yields did not fall enough to raise the appeal of overseas investments, and institutions instead repatriated funds.

"Now that JGB yields are passing the 'yield threshold' we are seeing an increasing likelihood that Japanese investors will finally invest more overseas," the Citi strategists said.