FOREX-Yen soars as Portuguese bank fears spark safety buying

Reuters

* Yen hits 5-month high against euro, 2-month high against dollar

* Fears over Portuguese banks create risk aversion

* Fed seen staying dovish, adding to dollar weakness (Adds quote, updates prices)

By Karen Brettell

NEW YORK, July 10 (Reuters) - The yen hit a five-month high against the euro and an almost two-month high against the dollar on Thursday, after concerns about Portugal's largest listed bank and weak Italian economic data hit European shares.

Concerns about the health of a parent company of Banco Espirito Santo bank hurt peripheral euro zone bonds, curbing demand at Greece's second debt sale following its 2012 default. It was the first significant episode of contagion for peripheral markets this year.

Safety buying sent U.S. Treasuries yields lower and increased demand for the Japanese currency. The yen was last up 0.64 percent to 137.74 against the euro, after earlier gaining to 137.46 yen, the highest since February 6.

The Japanese currency rose 0.34 percent to 101.25 yen against the dollar, after earlier rising to 101.04, the highest since May 21.

"We're seeing some problems coming out of Europe," said Sireen Harajli, a foreign exchange strategist at Mizuho Corporate Bank in New York. "Markets are selling euros and buying safe havens like the Japanese yen."

The move also came after data showed the steepest drop in Italian industrial output in almost two years.

The dollar gained 0.30 percent against the euro to $1.3602. The greenback also rose 0.20 percent against a broad basket of currencies to 80.151, according to the dollar index .

The move came after minutes from the Federal Reserve's June meeting on Wednesday showed a still-dovish central bank and failed to offer any new signals that the Fed is closer to raising interest rates, adding to pressure on the dollar.

"The Fed minutes were not as hawkish as the market had feared. It looks like the Fed won't be raising short-term rates any time sooner than what they've already communicated," said Gary Pollack, head of fixed-income trading at Deutsche Bank Private Wealth Management in New York.

The dollar has struggled to break above relatively tight ranges against the euro as Treasuries yields stay relatively low, with investors looking for stronger signals that the economy is gaining enough momentum for the Fed to begin raising interest rates.

"Unless Treasury yields start moving up, to reflect the better data from the United States, it would be a rather frustrating time for dollar bulls," said Jeremy Stretch, head of currency strategy at CIBC World Markets.

Kansas Fed President Esther George and Fed Vice Chair Stanley Fischer are both due to speak on Thursday.

(Additional reporting by Anirban Nag in London; Editing by Nick Zieminski)

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