FOREX-Yen rally slackens off, all eyes on ECB meeting

Reuters

* Yen pulls away from 4-mth high vs euro

* Japan core CPI up, does little to dissipate lowered BOJ easing expectations

* Revised Q1 U.S. GDP disappoints, but shrugged off as historical (New throughout, changes dateline from previous SYDNEY/TOKYO)

By Patrick Graham

LONDON, May 30 (Reuters) - The yen levelled off on Friday but still looked set to rack up its best gains for months after a jumbled week of currency moves that has broadly seen the dollar strengthen and the euro and sterling fall.

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 $0.9320.

Attention is now firmly focussed 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.

"We still have a bias towards a weaker dollar. Against the yen in particular there is still the danger of some sort of a snapback, just to clear out some stale yen shorts," said Adam Cole, global head of FX strategy with RBC Capital Markets in London.

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. Cole is one of those who believes a strong course of action by the bank next Thursday is fully in the price.

"There is a risk that we see some kneejerk selling on the day but in general a negative deposit rate and some sort of credit easing by the bank are largely in the price," he said.

The euro fetched 138.35 yen in early European trade, off a four-month low of 137.98. The dollar climbed off a one-week low of 101.42 to last stand at 101.55.

The euro inched up 0.07 percent to $1.3611.

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.

"It has been a slack year but a lot of people are beginning to wonder again if this is the new normal," said a chief dealer with one bank in London.

Data on Friday did little to dissipate lowered expectations for further BOJ easing, with Japan's core consumer prices jumping 3.2 percent in April from a year earlier and posting an 11th straight month of annual gains.

"Market reaction to the CPI was limited, and we likely to see prices deviate time to time from expectations going forward," said Junichi Ishikawa, market analyst at IG Securities in Tokyo.

"But prices have been rising roughly as the BOJ wants and expectations for further easing will naturally ebb as a result, which is a yen-buying factor." (Additional reporting by Ian Chua in Sydney and Shinichi Saoshiro in Tokyo Editing by Jeremy Gaunt)

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