By Patrick Graham
LONDON (Reuters) - The yen sagged against the dollar on Thursday on news that Japan's public pension fund plans to increase its allocation to the domestic stock market, while the euro was flat ahead of a monthly decision on interest rates.
The dollar rose 0.2 percent to 102.33 yen, pulling away from a 1-1/2 week low near 101.76 yen set on Wednesday. After a bullish month of trading which has raised expectations of a longer-lasting rally, the greenback was just below 11-month highs against a trade-weighted basket of major currencies.
All eyes in Europe were on the European Central Bank's monthly news conference, starting at 08.30 a.m. EDT, but the action overnight was all about the yen and the Australian dollar. The latter was down almost 1 percent to hit a two-month low after data showed a rise in the Australian jobless rate.
The yen, attractive for investors seeking shelter from growing tensions between the West and Russia, weakened as Tokyo shares pushed higher after political sources told Reuters that Japan's Government Pension Investment Fund (GPIF)plans to put over 20 percent of its funds in domestic stocks compared with a current 12 percent target.
Gains in equities tend to weigh on the safe-haven yen, as investors target riskier assets on expectations of making bigger returns.
"It is that news on the GPIF that has moved dollar-yen this morning," said Daragh Maher, a strategist with HSBC in London.
"We had some peculiar price action late yesterday that is also being retraced, but the GPIF story gave a fundamental rationale for the push higher."
The Australian dollar, hammered by an unexpected jump in the domestic jobless rate, was down 0.9 percent at $0.9268 in early European deals. It fell to $0.9263 at one point, its lowest level since early June.
"The Aussie had been holding up better than the New Zealand dollar and the data are a perfect excuse for some catch-up," said Kit Juckes, a currency strategist with French bank SG in London.
"Hopes of a chance to sell the Aussie back above 0.94 have faded significantly. The Australian/US rate differential is pointing firmly downwards for the currency from here."
The Reserve Bank of Australia kept its cash rate at a record low of 2.5 percent on Wednesday, but the jobs numbers underlined continuing worries over the economy's growth prospects after the end of a mining investment boom.
The euro, down six full cents since early May on the back of a moribund economic outlook and the raft of measures taken by the ECB to ease monetary conditions, was down less than 0.1 percent at $1.3379.
On Wednesday, it had skidded to as low as $1.3333, its lowest level since last November as disappointing data from Italy and Germany soured sentiment toward the single currency.
The ECB is expected to keep rates on hold as it assesses the impact of stimulus it launched in June, when it cut rates to record lows, became the first major central bank to charge banks for holding their deposits overnight and launched a new ultra-cheap, four-year loan program.
Markets will be watching how President Mario Draghi characterizes the state of the economy, given the pressure that risks to German growth and Russian sanctions may put on the overall euro zone outlook.
HSBC's Maher said Draghi could sidestep all questions essentially by saying that he has to wait and see what impact the policy measures taken in June have.
"But I think the sensible questions will be about whether the downside surprises we have seen, Italy sinking back into recession and so on, make it more likely the ECB will take further steps," he said.
"I think the balance of risks is against the euro."
(Editing by Susan Fenton and Hugh Lawson)