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Yen rally slackens off, all eyes on ECB meeting

The yen leveled off on Friday but still looked set to rack up its best gains for months, after a jumbled week of currency moves that has seen the dollar inch higher at the expense of euro and sterling.

The Australian dollar, this week's biggest gainer among the major currency pairs, also added to some hefty gains in the previous session but was bumping up against resistance around $0.93.

Sweden's crown sank half a percent after weak growth data bolstered the case for lower interest rates.

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Attention is now firmly focused on next week's European Central Bank policy meeting, expected to deliver more policy easing. It comes at a time when the conviction of many that the Bank of Japan would do similarly this summer has been shaken, underpinning the rise for the yen to three-month highs against the euro.

Likewise, while the dollar has gained this week, U.S. Treasury yields have fallen and dealers said there was talk of some substantial fund option bets on the yen strengthening to as little as 98 per dollar over the next month.

Those with "short" positions - or bets that the yen will weaken - have been squeezed by an almost 3-percent march higher for the Japanese currency since early April, driven in part by the fading of expectations for more easing from the BoJ.

The euro has fallen almost 3 percent in the past three weeks, hammered by expectations that the ECB will deliver a substantial blow to pump more cash into the euro zone economy and lower market interest rates.

That move has left the market looking divided, however, on whether the euro can fall any further, whatever the ECB does next week.

The euro fetched more than 138 yen in early European trade, off a four-month low. The dollar hauled itself back from a one-week low to stand near 102.

The euro was also up about 0.07 percent to roughly $1.36.

BOJ

Volatility, the fuel for speculation on foreign exchange markets, has bumped along close to record lows this year, dampened by an extended period of ultra-low interest rates across the developed world.

Some dealers hope that the ECB meeting next week could be the trigger for a greater divergence between Europe, Japan and the United States that may finally wake investors up. The slackening off of the euro's gain in the past week argues against that.

The price of an options contract betting on a sharper move within a month for the euro in response to the bank's meeting has jumped from a 7-year low near 5.93.

Yet many dealers say the slackening off of the pace of the euro's losses in the past week argues against any greater move after the ECB meets.

—By Reuters

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