* Weak German, euro zone GDP slams euro
* Yen hits 2-month high vs dollar, 2-week high vs euro
* Dollar/yen on track for biggest weekly fall since late Oct
(Adds quotes, updates prices, changes byline)
By Jamie McGeever
LONDON, May 15 (Reuters) - The yen rallied broadly on Friday
as European stock losses dulled investor appetite for risky
assets, while the euro slid across the board after data showed
the euro zone economy shrank at its fastest pace on record.
The euro's losses on the fastest ever contraction in the
euro zone economy were greatest against the yen, which helped
spur the Japanese currency to a two-month high against the
dollar.
The 16-nation euro zone economy shrank 2.5 percent in the
first quarter from the previous quarter and 4.6 percent from the
same period a year ago, driven by a plunge in German output.
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This hurt the euro and fed into broader stock market
selling, with European stocks down 0.5 percent <>, UK
stocks down 1 percent <> and U.S. stock futures pointing to
opening losses of up to 0.8 percent.
Investors sought currencies perceived to be safer assets
like the yen, which speculators still regard as the funding
currency of choice when risk appetite is high.
"The story isn't as much that the (euro zone) data was weak,
but how weak. It was a massive surprise just how weak the data
was ... and that was the main trigger for the euro to go lower,"
said Paul Mackel, senior currency strategist at HSBC in London.
"And the yen is trading well, and seems to have some
momentum but that's largely a function of euro/yen."
At 1200 GMT euro was down 1.6 percent against the yen at
128.60 yen <EURJPY=R>, having hit a two-week low around 128.41
yen earlier.
The euro also shed 0.8 percent against the dollar to trade
at $1.3530 <EUR=>, near the lows for the week.
The dollar was down 0.9 percent against the yen at 95.05 yen
<JPY=>, having hit a two-month low of 94.78 yen on trading
platform EBS. A close below the 100-day moving average of 95.14
yen will be the first for three months, Reuters charts show.
The euro was well on track for its biggest weekly loss
against the yen since late January and the dollar/yen on track
for its steepest weekly decline since its collapse in late
October.
The Australian dollar fell 1.8 percent against the yen to
71.51 yen <AUDJPY=R> and sterling was down 1.2 percent against
the Japanese currency at 144.20 yen <GBPJPY=R>.
YEN AGAIN
Later in the day investors will look to U.S. inflation data,
U.S. portfolio flow figures and the New York Federal Reserve's
manufacturing index <ECON>.
More surprises showing the economy isn't poised to recover
quite as much or as quickly as previously thought could
reinforce investors' desire to cut their exposure to risk,
especially ahead of the weekend, supporting the yen.
"We are seeing a broad correction to the recent risk rally,
and the yen is still seen by speculators as the favoured funding
currency," BNP Paribas currency strategist Ian Stannard said.
Analysts said the yen's outperformance suggests the recent
evidence of Japanese investors looking towards their domestic
markets is now translating into yen strength.
"The rate of reward (in foreign bonds) is on the wane and
with rates set to be low across the world for the foreseeable
future, Japanese investors are becoming increasingly risk
intolerant and turning to their domestic market," Bank of New
York Mellon currency strategist Neil Mellor said.
In interviews with Reuters late last month, many of the top
nine Japanese life insurers said they would increase their
holdings of yen bonds as uncertainty over a global economy deep
in recession leaves them in defensive mode. []
Recent data also showed Japanese investors turned net buyers
of bonds in the week from April 26 to May 2 after three straight
weeks of being sizeable net sellers [].
(Additional reporting by Jessica Mortimer)
