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FOREX-Korean tensions keep yen near eight-week highs

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  1. (Adds Swiss franc milestone, updates prices)

    • FX markets steadier in morning trade in Europe
    • Yen gained overnight on Trump comments on Korea
    • Morgan Stanley forecasts more euro gains
    • Graphic: World FX rates in 2017 http://tmsnrt.rs/2egbfVh

    The dollar was pinned close to an eight-week low against the yen on Friday as escalating tension over North Korea dominated currency markets thinned out by the summer holidays in Europe and the United States.

    The yen gained more than 0.2 percent in Asian time as investors took their money out of higher-yielding currency plays following another warning from President Donald Trump to Pyongyang.

    It stood 0.16 percent down on the day at 109.03 yen per dollar by 1047 GMT. The dollar index, which measures its strength against a basket of currencies, was roughly flat at 93.420. .DXY

    "More likely than anything else, the price action was a function of an overextended U.S. equity market that has been in need for a healthy correction off record highs," LMAX Exchange analysts said in a morning note.

    "The direction in global equities will likely play a major role in the yen's direction today, while the market will also be interested to see what comes of US CPI data."

    The Korean story has seen the yen gain around 1.5 percent this week, its biggest rise since mid-May. The 1.3 percent gain for the market's main other choice for borrowing to fund speculation, the Swiss franc EURCHF= against the euro, is its biggest rise in more than a year.

    That in part reflects recent price action and positioning on both. A rise in expectations for global inflation has left investors generally short of the two currencies and the turnaround in the franc this week by contrast follows its worst week since the Swiss National Bank removed a ceiling on the currency in January 2015.

    Raising their forecasts for the euro, Morgan Stanley analysts said Switzerland's asset management industry, which has held or hedged huge inflows in francs since the euro zone's debt crisis took hold in 2010, would finally begin to reduce its franc position in the months ahead.

    In a note sent to clients late on Thursday, the U.S. bank predicted the single currency would rise to $1.25 in the first quarter of next year and reach parity with sterling for the first time.

    "With (the euro zone's) political and economic outlook looking better, Swiss accounts could emerge as a main euro buyer, pushing the euro up across the board," they said.

    The euro, which hit its highest since the start of 2015 on Aug. 2, dipped 0.1 percent to $1.1761 in morning trade in Europe.

    It was 0.2 percent lower at 1.1310 francs EURCHF= , compared with highs of 1.1537 francs hit a week ago.

    For Reuters Live Markets blog on European and UK stock markets see reuter//realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets

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