* Dollar stays firm, euro under $1.26
* Dollar/yen pokes above 110 threshold, first since 2008
* Investors position for good U.S. data (Adds details)
By Anirban Nag
LONDON, Oct 1 (Reuters) – The dollar rose above 110 yen for the first time in six years and held near a two-year peak against the euro on Wednesday as investors added to bets that U.S. economic data will lead the Federal Reserve to tighten monetary policy.
Commodity currencies such as the Australian and New Zealand dollars suffered as oil and copper prices remained under pressure, with the Aussie hit particularly hard after weaker-than-expected retail sales data.
The dollar was up 0.25 percent at 109.90, having risen past 110 yen during Asian trade. It eased from a high of 110.09 yen on profit taking, but most traders said the outlook for the dollar remained bullish.
“The yen remains under pressure,” said Esther Reichelt, currency strategist at Commerzbank. “Good U.S. data might lead to a serious test of the technically important resistance at 110.67 yen, which was the August 2008 high.”
Better-than-expected U.S. data, especially labour market numbers and manufacturing activity, could fan speculation of an early interest rate rise by the Fed.
“Friday’s non-farm payrolls will be key, as it could raise rate hike expectations another notch,” said Shinichiro Kadota, chief Japan FX strategist at Barclays Bank in Tokyo.
The market barely reacted to a comment by a Japanese government spokesman who said the weak yen needed to be monitored, but traders remained on guard in case authorities’ warnings becomes louder.
The dollar also rose against the euro, given fresh evidence of a slowdown in euro zone inflation.
That fed the view that monetary policies in Europe and the United States are on diverging paths. While the Fed is expected to tighten at some point, there is a growing view that the European Central Bank will need to implement a full-blown policy of government bond-buying to fend off the threat of deflation.
Many believe the U.S. economy is on a recovery path that will allow the Fed to raise interest rates well before the ECB and Bank of Japan.
The euro languished near a fresh two-year trough, having come under pressure after data showed euro zone annual inflation cooled to 0.3 percent in September from 0.4 percent, intensifying the case for the ECB to offer more stimulus, including quantitative easing.
The common currency fell as far as $1.2571 on Tuesday and was last trading at $1.2595, down 0.3 percent. The euro lost nearly 4 percent in September – its biggest decline in over two years – and the latest manufacturing activity reports from the euro zone did little to offer the euro any support.
Analysts said the soft inflation data and subdued manufacturing activity from the euro zone would keep pressure on the ECB to address the risk of deflation.
The ECB meets on Thursday to discuss monetary policy.
“With euro zone inflation hitting a cycle low and the core reading at 0.7 percent, the risks of entering deflation in the euro zone are building. Inflation expectations in Europe have collapsed to levels previously seen in 2010 when euro/dollar was trading around $1.20,” Morgan Stanley said in a note.
“The breach of the $1.26 level will certainly bring the 1.20 lows, last seen in 2012, back into focus.”
Despite overall bearishness, the euro managed to gain against the Swiss franc, rebounding from a low of 1.2054 on worries that the Swiss National Bank could intervene to weaken the franc. The euro was last trading at 1.2072 francs, up 0.1 percent on the day. (Additional reporting by Shinichi Saoshiro in Tokyo; Editing by Hugh Lawson)