FOREX-Dollar surges to five-year high vs yen on GDP data, BoJ

Reuters

* U.S. Q3 GDP revised higher in final estimate

* Dollar supported by higher Treasury yields

* Bank of Japan votes to keep monetary policy loose

* euro down, S&P downgrades European Union

By Gertrude Chavez-Dreyfuss

NEW YORK, Dec 20 (Reuters) - The dollar hit a more than five-year high versus the yen on Friday, on track for its best weekly performance in six weeks, as U.S. economic growth data for the third quarter reinforced the Federal Reserve's decision to start paring back stimulus.

Yen losses versus the dollar were compounded by a decision by the Bank of Japan to maintain its pledge of increasing base money in the financial system.

The greenback also climbed to two-week peaks against both the euro and the Swiss franc.

Data showed the U.S. economy grew at its fastest pace in almost two years in the third quarter while business spending was stronger than previously estimated.

Gross domestic product grew at a 4.1 percent annual rate instead of the 3.6 percent pace reported earlier this month, the Commerce Department said in its third estimate on Friday.

"The GDP report was consistent with an improving U.S. economy, validating the Fed's decision this week to taper stimulus by $10 billion," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.

The dollar rose to 104.64 yen, its highest since October 2008, and was recently at 104.42 yen, up 0.2 percent. On the week, the dollar was up 1.21 percent, its best weekly showing since the week of Nov. 8.

In contrast to the Fed, the BoJ reaffirmed overnight it would keep monetary policy loose. Dollar bulls are now targeting a level around 105.25 yen, a 61.8 percent retracement of the dollar's fall from its 2007 high of 124.14 yen to its 2011 low of 75.31 yen.

The greenback earlier gained against the euro, which was held back by S&P's decision to cut the European Union's supranational long-term rating to AA-plus from AAA, citing rising tensions on budget negotiations.

The euro, which has surprised many analysts and hedge fund managers by moving higher against the dollar since the summer, fell to $1.3623, its lowest since Dec. 5. The euro last traded at $1.3660, flat on the day.

On the week, the euro was down 0.6 percent, its weakest weekly performance in seven weeks.

The common currency has been boosted in recent weeks by tightening monetary conditions in the euro zone as banks repay cheap borrowing to the European Central Bank. Next week banks will return 20.7 billion euros, the ECB said on Friday, which is above expectations and which will offer further support to the currency.

MORE FROM BOJ TO COME

Two-year U.S. yields rose from 0.34 percent to 0.3677 percent on Thursday, with the differential over Japanese two-year yields now at its highest since early October. On Friday, U.S. two-year yields were at 0.37 percent.

The BoJ voted unanimously to keep its pledge of raising base money, or cash and deposits at the central bank, at an annual pace of 60 trillion yen ($576 billion) to 70 trillion yen.

BoJ Governor Haruhiko Kuroda said on Friday the correction in the yen's "excessive" strength had been positive for Japan's economy.

Nearly two-thirds of Japanese companies expect the BOJ to ease further in the first six months of 2014, as it tries to achieve 2 percent inflation within two years, a Reuters poll showed earlier this month.

"No change (in BoJ policy) is likely until perhaps after the hike in the consumption tax in April," said Marshall Gittler, head of global FX strategy at IronFX Global in Limassol, Cyprus. "After that, look for further easing to help the economy, which should weaken the yen further."

The Australian dollar, meanwhile, was trading above a 3-1/2-year low hit after the Fed revealed its stimulus reduction plans. On Friday, The Aussie dollar last changed hands at US$0.8887, up 0.4 percent on the day.

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