FOREX-Euro advances on lingering bearish dollar sentiment

Gertrude Chavez-Dreyfuss
Thursday, 24 Oct 2013 | 9:38 AM ET

* Euro stays near two-year high versus weak dollar

* Pares gains after below-forecast euro zone PMI data

* But outlook still bright due to bearish dollar sentiment

* Dollar weak on expected Fed taper delay, lower U.S. yields

NEW YORK, Oct 24 (Reuters) - The euro inched higher on Thursday, to a fresh two-year peak against the dollar, as concerns about the outlook for the U.S. economy and monetary policy outweighed weaker euro zone data.

The dollar remained under pressure due to lower U.S. bond yields and expectations the Federal Reserve will maintain its stimulus program well into next year.

"The dollar is kind of drifting lower because of the delay in the Fed tapering, but it kind of feels like there is no direction at the moment," said Vassili Serebriakov, currency strategist at BNP Paribas in New York.

"There is no real big consensus trade anywhere. Until two days ago, people liked risk, but now some of those risk is being sold off."

The euro was up 0.3 percent at $1.3816, having earlier hit $1.3824, its strongest level since November 2011.

It came off its highs after purchasing managers' surveys for the euro zone showed the pace of growth in business activity eased unexpectedly this month, suggesting the region's recovery may be less solid than previously thought.

Analysts and traders said, as a result, the euro may struggle to make a sustained break above $1.38.

"While the PMI numbers were far from generating champagne-popping excitement, they do corroborate the bumpy path to recovery in the EU, and the lengthy time it will take to make any meaningful headway," said Scott Smith, senior corporate FX trader at Cambridge Mercantile Group in Calgary, Canada.

Jane Foley, senior currency strategist at Rabobank in London said Thursday's peak of $1.3824 could act as stiff chart resistance for the euro for now.

"The disappointing tone of the euro zone data will suggest that the euro is looking toppy up here, and this should keep euro/dollar in check," said Foley.

In the United States, jobless claims fell less than expected in the latest week to a seasonally-adjusted 350,000. The data, however, did not reflect the true picture because California continued to process a backlog of applications caused by computer problems.

The dollar fell broadly, hitting a near nine-month low against a basket of currencies of 79.081. It was last down 0.1 percent on the day at 79.149.

Weak U.S. jobs data on Tuesday suggested the U.S. recovery was not yet on a firm footing, while a drop in the 10-year U.S. Treasury yield on Wednesday to a three-month low further dented the dollar's appeal.

The dollar dipped 0.1 percent against the yen to 97.30 yen but held above Wednesday's two-week low of 97.15 yen.

The Australian dollar was down 0.3 percent at $0.9591, paring gains after an earlier boost from data showing Chinese manufacturing activity hit a seven-month high in October.

Analysts said concerns remained about rising money market rates in China, which may weigh on the Australian currency. China's benchmark seven-day repo rate rose nearly a full percentage point on Thursday after China's central bank let cash flow out of the money market for a second week.

The New Zealand dollar was also lower on the day, down 0.6 percent at US$0.8336.