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FOREX-Euro near two-year high vs dollar; outlook stays positive

Julie Haviv
Friday, 25 Oct 2013 | 2:10 PM ET

* Euro hovers below two-year high vs dollar after soft German Ifo data

* Common currency still on course for gains against a weak dollar

NEW YORK, Oct 25 (Reuters) - The euro hovered close to a two-year high against the dollar on Friday as a souring of German business morale did little to dent bullish sentiment toward the euro zone common currency. German Ifo business sentiment data fell unexpectedly for the first time in six months, sparking concern about the impact of a stronger euro on the region's exporters. That followed sub-forecast euro zone private sector activity surveys on Thursday, suggesting that recovery in the euro zone has stalled. Still, the euro's fall was minimal and many analysts say it could rise toward $1.40 as investors seek alternatives to a dollar hobbled by expectations the Federal Reserve will maintain its current level of monetary stimulus. "Traders continue to make the euro their favorite anti-dollar trade in light of expectations the Fed will continue its QE (quantitative easing) program well into the start of next year," said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York. In contrast, Schlossberg noted that market participants do not expect any change in the European Central Bank's monetary policy despite recent the soft euro zone data. That should keep the euro well bid, at least against the dollar, he added. In afternoon New York trading, the euro was unchanged at $1.3804, not far from an earlier peak of $1.3833, its highest since November 2011. The euro, at current prices, is up nearly 0.9 percent on the week, its second straight weekly gain. It has risen 2.1 percent month to date, with its annual gain at 4.6 percent. Technical analysts said the euro faced stiff resistance at Friday's $1.3833 peak, the 61.8 percent retracement of the currency's fall between May 2011 and July 2012. "The euro is due for a short-term correction and could drop towards $1.3720," said Hans Redeker, head of global foreign exchange strategy at Morgan Stanley. "But by the first week of December it could be as high as $1.42." He expected the euro to be one of the main beneficiaries of a weaker dollar, and as euro zone banks sell assets to foreign investors to shrink their balance sheets in preparation for an ECB asset quality review. Some euro zone officials have shown no concern about a strong euro. ECB Executive Board member Joerg Asmussen was quoted on Friday as saying the ECB is not concerned about the level of the euro. Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington, however, thinks the ECB's tune on a strong euro could change at some point. "Euro zone officials are unlikely to sit idly while a rise in the euro threatens to derail a fragile economic rebound," said Esiner. "Increased vocal opposition to euro strength by policymakers will further limit the currency's gains." Against the yen, the euro was up 0.2 percent at 134.42 yen . The dollar was flat against a currency basket of six major currencies at 79.208, off a near nine-month low of 78.998. The dollar index's composition is dominated by the euro. Economists reckon this month's 16-day U.S. government shutdown shaved as much as 0.6 percentage point off annualized fourth-quarter gross domestic product through reduced government output and damage to consumer and business confidence. However, some analysts said the euro could be vulnerable to signs the euro zone's tentative recovery is losing steam, especially with a strong euro seen hurting the region's exporters. The euro's trade-weighted index was at a two-year high. The dollar was up 0.1 percent against the yen at 97.38 yen , off a two-week low of 96.94 and above its 200-day moving average, a key chart level, at 97.34, suggesting room for more gains. The dollar slightly pared gains versus the yen after the Japan Meteorological Agency issued a 'yellow' warning early on Saturday morning, Japan time, that a small tsunami would reach the Japanese coast at Fukushima, site of a wrecked nuclear power plant, after the U.S. Geological Survey reported a 7.6 magnitude quake 231 miles to the east.