FOREX-Yen at 3-1/2 mth high on BOJ Kuroda's optimism, sterling shines

* BOJ's Kuroda comments drive yen to highs

* Euro pegged back ahead of European election

* Sterling index at 5-1/2 year high after BoE (Shenzhen: 000725.SZ - news) minutes, UK data (adds quote, options trading)

By Anirban Nag

LONDON, May 21 (Reuters) - The yen rose to a 3-1/2 month high against a struggling dollar and euro on Wednesday, buoyed by optimistic comments from Bank of Japan chief Haruhiko Kuroda which gave no hint of further monetary easing in the near term.

The biggest volumes though were seen in the pound, which rose to a 5-1/2 year high against a basket of currencies, after a surge in retail sales last month and signs some Bank of England policymakers are leaning towards a rate hike.

Adding to the dollar's woes were lower U.S. Treasury yields which diminishes the greenback's appeal. U.S. bond yields fell on Tuesday after New York Federal Reserve President William Dudley said the central bank would likely be gradual in raising interest rates.

Investors are also keeping an eye on the Federal Reserve's April policy meeting minutes due later in the day. While the Fed is not expected to raise rates until at least the middle of next year, investors will be keen to learn whether officials discussed the myriad issues about policy normalisation.

The dollar fell to a 3-1/2-month low against the yen of 100.805 yen in London trade after Kuroda said a Japanese economic recovery was on track after the sales tax hike in April. The tax hike was expected to dampen consumer demand and put pressure on the BoJ to ease policy in coming months.

But Kuroda gave nothing away about further easing. He said that the massive asset purchase programme launched last year was still working and was having its desired effect.

The BoJ also raised its assessment on capital expenditure and Kuroda reiterated that Japan is on course to meet the bank's 2 percent inflation target in about a year from now. All of which meant the yen was likely to be supported in the near term.

"Kuroda's comments are lowering expectations of further BoJ stimulus. Investors have been long dollar/short yen so there is position squaring going on which is driving the dollar lower," said Manuel Oliveri FX strategist at Credit Agricole (TLO: ACA.TI - news) .

"At the same time one has to be cautious about the FOMC minutes with Yellen also due to speak later in the day."

Federal Reserve Chair Janet Yellen is scheduled to give a commencement address and receive an honorary degree in New York (Frankfurt: HX6.F - news) later in the day.

In the options market, one-month dollar/yen implied volatility - or the expected price swing - rose to its highest in three weeks, highlighting expectations that the pair is likely to see a new trading range in coming weeks.

EURO STUMBLES, STERLING SURGES

The euro fell to 138.23 yen, its lowest since early February and down 0.4 percent on the day.

The euro also slid to a 16-month low against the British pound of 81.03 pence, with the single currency under broad pressure on expectations the European Central Bank will ease monetary policy next month.

It failed to get a boost from a subdued dollar, trading lower on the day at $1.3692. The euro is unlikely to make much headway ahead of potentially destabilising European Parliament elections later this week, where votes for anti-austerity, Eurosceptic parties look set to increase.

"The market is definitely on a "wait and see" mode, ahead of ECB meeting and the outcome of EU elections. I am still moderately bearish on the euro, with a short term target just above $1.3650," said Francesco Scotto, portfolio manager at RTFX Fund Management.

(Editing by Toby Chopra)