FOREX-Euro at four-year high vs yen on German coalition deal

* Major German parties reach deal on grand coalition

* Euro at near 1-month high vs dollar, four-year high vs yen

* U.S. jobless claims drop in latest week

* Volume light before U.S. Thanksgiving holiday

By Julie Haviv

NEW YORK, Nov 27 (Reuters) - The euro soared to its highest

in four years against the yen and a near one-month peak versus

the dollar on Wednesday after Germany's two major parties

reached a deal on forming a grand coalition.

German Chancellor Angela Merkel's conservatives clinched a

deal with the Social Democrats, triggering a relief rally for

the euro. A new government should be formed before year-end.

The lengthy talks ahead of the deal delayed movement on

major European reforms, including the creation of a "banking

union", an ambitious project designed to prevent a recurrence of

the euro zone's crippling debt crisis.

The euro also garnered support from a survey showing German

consumer sentiment at a six-year high. This followed

unexpectedly robust Ifo business sentiment figures issued last

week.

Volume was light in New York trade ahead of Thursday's

Thanksgiving Day holiday during which U.S. financial markets

will be closed.

"The coalition agreement in Germany suggests an expansionary

budget, which should be positive for the euro," said Hans

Redeker, head of global foreign exchange strategy at Morgan

Stanley (Shenzhen: 002588.SZ - news) .

However, he said levels above $1.36 provided opportunities

to sell the euro, which has gained more than 2 percent since the

European Central Bank cut interest rates earlier this month.

The euro last traded up 0.2 percent at $1.3594,

below an earlier high of $1.3612, its strongest since Oct (KOSDAQ: 039200.KQ - news) . 31.

The single currency also hit 138.54 yen, giving

it the potential to target the 2009 peak of 139.26 yen. It last

traded at 138.48 yen, up 0.8 percent on the day.

Concerns remained about a weak euro zone economy and

deflationary pressures that may prompt further action from the

European Central Bank. However, euro zone inflation data on

Friday is expected to show a small acceleration, an outcome that

could help the euro.

"Looking ahead, the key focus in Europe this week is the

euro area November CPI report on Friday," Barclays Capital said.

"Judging from recent market trends, notably the rise in the

euro and euro real yields, it would seem investors may be

worried that any action by the ECB to offset deflation risks

will not be enough," the bank said.

The dollar, meanwhile, held losses versus the euro and

remained higher against the yen after mixed U.S. data.

The number of Americans filing new claims for unemployment

benefits unexpectedly fell last week.

While the jobs picture is brightening a bit, factory

activity appears to be losing momentum, with business spending

on capital goods weakening and new orders for long-lasting

manufactured goods falling last month.

"The grand coalition in Germany removes a big political

uncertainty and will support the euro in the short term," said

Arne Lohmann Rasmussen, head of currency research at Danske Bank (Other OTC: DNSKY - news)

in Copenhagen.

He and other analysts expected euro gains against the dollar

would be limited due to the prospect of further monetary easing

from the ECB and of the U.S. Federal Reserve scaling back

stimulus next year. Rasmussen recommended selling the euro if it

strengthened to $1.37/$1.38.

The dollar was up 0.5 percent against the yen at 101.82

yen, with the low-yielding Japanese currency pressured by

higher Japanese equities. This took it close to Monday's

six-month high of 101.91 yen.

Investors were also watching developments in the East China

Sea, after two U.S. B-52 bombers on a training mission flew over

disputed islands without informing Beijing.