Resilient euro just won't be held back
The euro hovered near five-week highs against the dollar on Friday and analysts say it could be headed for further gains now that the prospect of negative interest rates in the euro zone appears to be off the table.
On Thursday, European Central Bank (ECB) President Mario Draghi reassured investors that the central bank had no plans to ease monetary policy again, sending the currency soaring. The bank also upgraded its 2014 gross domestic product growth forecast for the euro zone by 0.1 percentage points to 1.1 percent.
Last month the ECB cut its key interest rate by 25 basis points to 0.25 percent. Just two weeks ago reports that the ECB was contemplating negative deposit rates delivered the euro a blow although the currency soon bounced back.
In early Asian trade on Friday, the euro was at 1.3667 to the dollar, within sight of a five-week high hit on Thursday. It is one of the best-performing major currencies this year, returning 3.58 percent year to date against the dollar. It's performed especially well against the yen with a 22.47 percent return year to date, and the Australian dollar with an 18.87 return percent.
"With negative rates no longer an imminent threat to the euro, the currency could aim for its yearly high against the dollar if payrolls surprise to the downside," said Kathy Lien, managing director at BK Asset Management, referring to the euro's highest level against the dollar seen this year, when it traded at 1.3832 to the dollar in late October.
A weaker-than-expected non-farm payrolls figure would damp tapering expectations, weaken the dollar and therefore strengthen the euro, analysts said.
Economists expect the creation of 180,000 new jobs in the U.S. in November, weaker than the 204,000 jobs created in October.
Signs that the beleaguered euro zone economy could be picking up have bolstered bullish forecasts for the euro, which has been resilient despite more recent negative data points out of the region that have raised questions over the strength of the recovery, including a drop in inflation to a four-year low in October and last month's ECB rate cut.
"Draghi stated that the ECB has many options but is not close to deciding on which one to use, and markets are taking it to mean that easing is not likely in the short-term," said Chang Wei Lang of the Singapore Treasury Department at Mizuho Bank. "Another bullish factor was that ECB raised its 2014 growth forecast to 1.1 percent (from 1 percent)," she added.
According to technical analyst Daryl Guppy, CEO of Guppy Traders, the euro is lingering near some important technical levels that could see it break upwards to around 1.40 per dollar.
"There is a resistance level at 1.37 (per dollar), we've broken just above that once before, we're tackling that once again. If we break above that then 1.40 is the next resistance level but if we drop below 1.355 then our downside target is sitting down at 1.32," he said.
However, other analysts argue that the euro is starting to look overvalued.
(Read more: Like the Fed, ECB expected to keep on pumping)
Sebastian Galy, senior currency strategist at Societe Generale, warned that the euro's resilience was not helping the region's economic outlook and was unlikely to last into next year.
"Euro strength is doing the euro area economy no favors and adding to the peripheral deflation risk," he said.
"Either European governments commit to more responsible policies and the ECB takes bolder action, or euro area financial stability will be exposed. In both cases the euro will fall in 2014," he added.
— By CNBC's Katie Holliday: Follow her on Twitter @hollidaykatie