Dollar retreats from recent high vs yen on profit taking

LONDON (Reuters) - The dollar retreated from a 31-month high against the yen on Friday as investors took profit on its steep rise before expected aggressive policy easing next week by the Bank of Japan.

Strategists said the fall in the dollar would likely be short-lived and the Japanese currency remained vulnerable to further losses if the BOJ takes steps beyond market expectations in an attempt to stave off deflation.

The dollar was down 0.1 percent against the yen at 89.81 yen. Strategists cited chart support at 87.80 yen, the low struck on Wednesday, while reported options barrier at 90.75 yen could act as a near-term resistance.

Earlier the dollar broke above options barriers at 90 yen to reach 90.21 on the EBS trading platform, its highest level since June 2010.

"This is just profit taking... The general trend speculators, hedge funds and investors are betting on at the moment is towards further yen weakness," said Bernd Berg, global FX strategist at Credit Suisse.

"We think this trend is going to continue unless the BOJ disappoints, which I think is unlikely."

Sources familiar with the BOJ's thinking told Reuters the central bank, under relentless pressure from Prime Minister Shinzo Abe, will consider making an open-ended commitment to buy assets until 2 percent inflation is in sight.

Such a plan would exceed market expectations, which have centered on the BOJ setting a 2 percent inflation target at its two-day meeting that ends on Tuesday and possibly increasing its asset-buying programme.

"A lot is priced in for next week's BOJ meeting. If asset purchases by the BOJ were unlimited that could lead to significantly higher levels in dollar/yen and euro/yen levels," said Peter Kinsella, currency strategist at Commerzbank.

"Levels past 93-95 yen within the next 2-3 weeks is not unreasonable."

Traders reported strong demand for options betting on further yen weakness, with one-month dollar/yen implied volatility - a measure of expected price movement - rising to its highest since August 2011.

One-month risk reversals showed demand to buy yen puts - or bets on the yen falling - also rose.

But some analysts said the BOJ could undershoot expectations and this could see the yen rebound.

EURO SLIPS

The euro fell 0.3 percent against the yen to 119.92 yen from 120.73 hit earlier - its highest since May 2011.

The euro was also down against the dollar, falling 0.2 percent on the day to $1.3355. It had earlier hit $1.3399, just shy of a 11-month high of $1.3404 set on Monday.

But strategists said the euro was likely to remain strong in the near term.

Easing concerns about the crisis in the euro zone and European Central Bank President Mario Draghi's upbeat comments last week have encouraged some investors to take on riskier trades. This has helped boost the euro and pushed down the Swiss franc, a preferred refuge in times of financial stress.

"Draghi's comments that he expected a recovery in the euro zone in 2013 surprised markets and helped move the euro higher against the dollar and especially against the Swiss franc," Credit Suisse's Berg said.

He expects the euro to hit $1.35 over the next few weeks, after which it would likely consolidate around those levels.

It climbed to a 20-month high against the Swiss franc of 1.2568 francs, with analysts expecting the Swiss currency to remain weak.

(Editing by John Stonestreet)