* Yen selling seen despite sharp rise in Japanese bond
yields
* Euro initially weakens after German ZEW sentiment data,
then steadies
* Fitch upgrades Greece sovereign rating
* Upcoming U.S. economic data eyed
By Julie Haviv
NEW YORK, May 14 (Reuters) - The yen fell against the dollar
on Tuesday for a fourth straight session, hitting its lowest
level in 4-1/2 years as signs that the U.S. economy is improving
and a global equities rally favored the greenback.
The Japanese yen has been in a downward spiral since
breaching the key 100-yen mark last week, partly as a result of
aggressive monetary policy action from the Bank of Japan, as
well as expectations that the U.S. Federal Reserve will taper
its monthly bond buying sometime this year.
The dollar's recent strength against the yen is also a
result of rallying U.S. equities, with the S&P 500 and Dow Jones (DJI: ^DJI - news)
indexes hitting a intraday highs while European shares touched
five-year highs.
"There has been a breakdown with the correlation between
dollar/yen and yield spreads. However, the currency and equities
continue to move in tandem," said Camilla Sutton, chief currency
strategist at Scotiabank in Toronto.
"For upside to continue, which we expect, we will likely
have to see a broadly stronger dollar combined with further
evidence that investors are favoring moves outside Japan," she
added.
Sutton holds a year-end dollar/yen forecast of 105 yen.
The dollar climbed as high as 102.31 yen on Tuesday -
its highest in 4-1/2 years - and last traded at 102.24 yen, up
0.4 percent on the day.
The euro last traded at 132.52 yen, up 0.3 percent
on the day.
The extended yen weakness came despite a spike in Japanese
government bond yields, which tends to reduce the relative
attractiveness of foreign bonds for investors in Japan.
The Bank of Japan could ease monetary policy as early as
October if prices do not rise as quickly as projected, according
to economists polled by Reuters who have also upgraded their
growth forecasts.
But the dollar was underpinned by Monday's data showing U.S.
retail sales rose unexpectedly in April, and it may gain further
if upcoming U.S. economic data point to a recovery.
"We think against the yen the dollar can go higher, helped
by rising U.S. yields," said Marcus Hettinger, FX strategist at
Credit Suisse (NYSE: CS - news) .
U.S. import prices fell in April due to a drop in oil costs,
a positive sign for household finances that also pointed to
benign inflation pressures.
More U.S. data will emerge this week, including Wednesday's
industrial production, housing starts and consumer prices on
Thursday and consumer sentiment data on Friday.
EURO STEADY VERSUS DOLLAR
The euro swung between minor gains and losses to last trade
flat, with stronger-than-expected euro zone industrial output
data offset showing German investor morale pointing to a tepid
recovery in Europe's largest economy.
The euro got a slight boost after Fitch Ratings agency
upgraded Greece's sovereign credit rating to B-minus from CCC,
with a stable outlook.
The euro remains weighed by the risk that the European
Central Bank could slash its deposit rate, at which banks park
surplus funds with it, to negative. Depositors would be charged
for leaving funds at the ECB, which would pressure the euro.
Germany's ZEW think tank said its monthly poll of economic
sentiment rose to 36.4 points from 36.3 in April, falling short
of expectations for a reading of 38.3.
Other data, however, showed output at euro zone factories
rose much more strongly than expected in March, but the overall
picture remained mixed as industrial output decreased in France
and Italy, the bloc's second- and third-largest economies.
"The euro seesawed after the mixed data from the region
largely offset (each other), keeping in place sentiment that's
largely bearish," said Joe Manimbo, senior market analyst at
Western Union Business Solutions in Washington D.C.
"Expectations that the ECB might further cheapen borrowing
rates to spur recovery at a time when the days of the Fed's
super-easy monetary policies appear increasingly numbered have
been among the chief catalysts driving the euro lower," he said.
Growth will return to the euro zone's recession-mired
economy in the second half of this year, but economists see no
chance it will recover strongly until at least 2015, a Reuters
poll showed on Tuesday. For other stories from
the poll, see:
While some ECB policymakers have talked openly of cutting
the deposit rate below its current level of zero percent, a
majority of economists and traders polled in the past week think
such a move is unlikely.
The European Central Bank clashed with Germany on Tuesday
over how quickly the euro zone should complete a system to deal
with failing banks.
The euro last traded flat against the dollar at $1.2974
. The euro on Friday hit a five-week low of $1.2935,
according to Reuters data.
