* Dollar breaks below 108 against the Japanese yen
* Euro hits fresh 2-1/2 year as Draghi fails to check FX
* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh
By Saikat Chatterjee
LONDON, Sept 8 (Reuters) - The euro climbed to a 2-1/2 year high on Friday after European Central Bank’s comments did little to deter market bulls who ramped up bets the single currency remained broadly undervalued against its rivals.
A Reuters report that central bank officials were in broad agreement that their next step would be to reduce their bond purchases also supported the currency and pushed bond yields higher.
Broadly, the dollar’s renewed weakness against its rivals over the last 24 hours indicated that fresh momentum was building behind the euro’s rise.
“The euro continues to be undervalued and the market is eager to correct that undervaluation after Draghi’s comments,” said Kit Juckes, a strategist with Societe Generale in London.
“Moreover, the latest move is a U.S. dollar move with both bond bears and dollar bulls capitulating while the dark clouds over the euro zone continue to lift.”
The euro was resting at $1.2067 after vaulting to $1.2092 in early trades, its highest level since January 2015. It has gained nearly 15 percent so far this year and is the best performing currency so far this year in the G10 FX space.
ECB President Mario Draghi referred several times in his post-meeting news conference to the euro’s strength, and said it was the main reason for a cut in the bank’s 2018-19 inflation forecasts. He also indicated any winding down of its massive stimulus programme was likely to be slow.
“The momentum is now well and truly behind the euro and we think we are going to see Part 2 of the euro-dollar rebound in the coming months,” said Christin Tuxen, an FX strategist at Danske Bank.
Gavekal strategists say the euro is likely to remain on an uptrend even though there are risks of a correction, because of strengthening fundamentals such as rising confidence and an improved growth trajectory.
Risk aversion pushed the dollar lower as the broader markets braced for North Korea celebrating its founding on Saturday, and as Hurricane Irma headed for Florida after wreaking havoc in the Caribbean.
The dollar index against a basket of six major currencies was down 0.6 percent at 91.11 after going as low as 91.011, its weakest since January 2015 and on track its biggest weekly loss in nearly 3-1/2 months.
New York Fed President William Dudley said on Thursday the U.S. central bank should continue gradually raising rates given low inflation should rebound, sounding slightly less confident than his previous hawkish comments after weak inflation readings.
With interest rates markets now pricing in only a 1 in 5 likelihood of a U.S. rate hike by the end of the year from 1 in 3 in barely two weeks, bond yields have fallen, weighing on the dollar.
George Saravelos, an FX strategist at Deutsche Bank said the market’s refusal to price additional rate hikes from the Fed was also weighing on the dollar.
For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
Reporting by Saikat Chatterjee; Editing by Robin Pomeroy
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