Euro Near Flat as US GDP Hints Slowing Ahead

The euro traded near flat against the dollar on Friday, paring early advances after data suggested that U.S. economic expansion could slow in coming months.

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The U.S. economy grew at its fastest pace in 1-1/2 years in the fourth quarter of 2011, but a strong rebuilding of stocks by businesses and a slower pace of spending on capital goods hinted at softer growth early this year. 

“The devil is in the details,” said Kathy Lien, director of currency research at GFT Forex in Jersey City, N.J. “Overall the details show far more weakness than the headline numbers.”

That, in turn, helped the greenback as well as the yen, both perceived as safe havens during times of economic uncertainty.

“In this type of market it's really about the need for safety,” Lien said. “The GDP isn't a doomsday scenario, but it definitely raises concerns about the sustainability of risk in general.”

The euro saw choppy trading after the data, dipping into and out of negative territory. More recently, the euro

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[EUR=X  Loading...      ()   ] traded at $1.3107, up 0.08 percent against the dollar.

The greenback also seesawed after the GDP data, reversing losses against the Swiss franc to move into and out of positive ground. The U.S. dollar

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[CHF=X  Loading...      ()   ] was more recently trading at 0.9207 francs, up 0.04 percent.

The single currency underperformed against the yen

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[EURJPY=X  Loading...      ()   ], as well, down 0.73 percent at 100.67 yen as the Japanese currency recovered broadly from lows struck this week.

The dollar fell around 0.83 percent to 76.80 yen

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[JPY=X  Loading...      ()   ], leaving the yen on track for its biggest daily gain since late December. Traders said Japanese corporates sold the dollar, which had been drifting lower after hitting a two-month high this week.

This prompted hedge funds to follow suit, pushing the greenback through support at its 100-day moving average.

The dollar hit a two-month high of 78.28 yen on Wednesday, according to Reuters data, but the rally stalled right below resistance at its 200-day moving average. It reversed further after the U.S. Federal Reserve pledged to keep rates low for a prolonged period.

With interest rate differentials moving in favor of the yen, the dollar was likely to stay subdued against the Japanese currency, said Ankita Dudani, G10 currency strategist at RBS.

The greenback has struggled since the U.S. Fed's dovish statement on Wednesday.

However, analysts said the ongoing euro zone debt crisis could keep investors wary of the single currency.

Chris Turner, chief foreign-exchange strategist at ING, said investors were underestimating the risks of a domino effect from Greece.

“Portugal could be a catalyst for a weaker euro in February,” he said. “The troika will be reviewing Portugal's adherence to its bailout package, while bond investors are already pricing a restructuring of Portuguese debt.”

Still, the Fed's decision encouraged the use of the dollar in carry trades and sparked big gains for commodities like gold and copper, while the commodity-linked Australian and New Zealand dollars hovered near three-month highs.

The euro had climbed earlier in the session on hopes for a breakthrough in talks between Greece and its creditors after euro zone finance officials voiced optimism that a deal to avoid a messy default was imminent.