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FOREX-Euro squeezed higher, Swedish crown dips to 1-1/2 year low

Anirban Nag
Thursday, 12 Dec 2013 | 4:43 AM ET

* Euro near 2013 peak against dollar, 5-year peak vs yen

* Swedish crown off as Riksbank cut seen certain after data

* Swiss franc falls after SNB says will keep intervening

LONDON, Dec 12 (Reuters) - The euro hovered near a two-year high against the dollar and a five-year peak versus the yen on Thursday, helped by higher short term market rates and year-end repatriation by European banks shoring up balance sheets.

The Swedish crown dropped to a 1-1/2 year low against the euro after data showing consumer prices falling and unemployment rising in Sweden cemented the case for a Riksbank interest rate cut next week, traders said.

The Swiss franc eased from this week's 7-month high against the euro after the Swiss National Bank warned it would keep intervening to weaken the franc and defend the peg at 1.20 francs to the euro.

Against the dollar, the euro was steady at $1.3790, having hit a six-week high of $1.3811 on Wednesday. It has climbed nearly 4 percent since Nov. 11 and within easy reach of its 2013 peak of $1.3833 set in October. The euro was up 0.5 percent against the yen, trading at 141.90 yen and close to its five-year peak of 142.19 yen

"The euro's rise towards two-year highs against the dollar is probably the path of least resistance," said Jeremy Stretch, head of currency strategy at CIBC World Markets. "There is nothing fundamental driving it but year end liquidity squeeze. Unless short term rates ease, we will see the euro remain bid."

In its monthly bulletin, the European Central Bank (ECB) said it would not let money markets rise too much, but there was little hint about what it would do to ease the crunch.

Excess cash in the euro zone money market usually dwindles towards the end of the year as banks refrain from lending to each other. Also driving euro strength this year is European banks repatriating funds to shore up capital before an ECB asset quality review.

The review will be based on banks' balance sheets at the end of 2013.

Highlighting this demand, 3-month eurodollar cross currency basis swaps were trading in positive territory for the first time since 2008. In other words, euro zone banks are paying a premium to buy euros in exchange for dollars.

SWEDISH CROWN FALLS

While the euro gained most against the yen, its rise against the Swedish crown was also robust. The crown fell to its lowest since May 2012 after the data, falling to 9.0749 crowns per euro after the data from 9.0287 before.

"The market is extrapolating the data will see some action from the Riksbank next week. This is driving down the crown," added CIBC's Stretch.

The Swiss franc fell against the euro to trade at 1.2243 francs after the SNB statement.

"The (SNB) statement sounded cautious on the GDP outlook in the very near term. All that may seem a tad dovish relative to market expectations going into the meeting," said Valentin Marinov, currency strategist at Citi.

Meanwhile, the dollar failed to get much of a boost from news that Congress has reached a bipartisan budget deal that would end three years of impasse and fiscal instability. The deal was seen clearing a potential hurdle for the Federal Reserve to taper its massive bond-buying programme.

It was flat on a basket of currencies at 79.92.

But it advanced against the yen. It rose to 102.88 yen , still below a seven-month high of 103.40 yen touched on Tuesday and off a session low of 102.39 yen. The dollar's next test is seen at 103.50 yen, with talk of an options-related barrier there.