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FOREX-Yen advances towards recent highs, aided by choppy stocks

Anirban Nag
Wednesday, 5 Feb 2014 | 7:05 AM ET

* Yen climbs towards 11-week highs vs dollar and euro

* U.S. data later in the session holds key to sentiment

* Sterling falls after below forecast UK PMI services data

LONDON, Feb 5 (Reuters) - The yen gained on Wednesday, advancing towards recent multi-month highs as stock markets struggled and confidence remained fragile in emerging markets, forcing investors to seek safe-haven currencies.

The dollar fell 0.4 percent to 101.20 yen while the euro dropped by a similar margin to 136.75 yen. Both the dollar and euro fell to 11-week troughs on Tuesday, when the dollar hit a low of 100.755 yen and the euro fell as low as 136.25 yen.

S&P stock futures were in the red, with data in the euro zone reflecting a glum mood and keeping the euro under pressure. Euro zone retail sales fell sharply in December while the final composite PMI survey fell short of its initial reading.

Investors are now awaiting data from the United States, especially the ADP reading on private hiring and ISM services sector survey due later on Wednesday. Any disappointment there would be taken badly by investors.

"Stock futures are falling so that is helping the yen," said Jeremy Stretch, head of currency strategy at CIBC World Markets. "The key will be the U.S. data, and any missing of forecasts will challenge the global recovery story and push dollar/yen towards the 100.60 support."

Reflecting the nervousness, implied volatility in the dollar/yen and the euro/yen pairs - a gauge of how sharp swings will be in the currency market - remained elevated. One-week dollar/yen implied vols were trading at 11.4 percent, up from around 8 percent a week ago.

Against the dollar, the euro was slightly lower at $1.3510 , holding above a two-month low around $1.3477 set on Monday amid caution that the European Central Bank could sound more dovish at Thursday's policy review.

With inflation running well below the ECB's target and the spectre of deflation gripping the euro zone, the central bank is under pressure to loosen policy. But there is also a risk that the ECB may hold off, a factor that could see the euro bounce.

Sterling fell 0.3 percent towards seven-week lows, and was last trading at $1.6270 after UK services PMI fell short of expectations and led investors trim expectations of a rate hike by the Bank of England in the near term.

"The softer-than-expected manufacturing PMI data on Monday and PMI services can be linked with the pound's poor performance but we expect that many investors are adjusting their positions in response to the increased risk that the BoE is poised to re-affirm a dovish position," said Jane Foley, senior currency strategist at Rabobank.

The Bank of England will release its quarterly inflation report next week and is widely expected to reaffirm its pledge to keep rates low for longer and tweak its unemployment target.