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Euro Surges vs Dollar, Yen, Boosted by German Data

Published: Thursday, 23 Feb 2012 | 3:23 PM ET

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By: Reuters

The euro surged to its highest in 2-1/2 months against the U.S. dollar and its strongest level versus the yen in more than three months on Thursday, bolstered by better-than-expected German data which offset a bleak economic forecast from the European Commission.

Euro bills and U.S. dollars being exchanged
AP
The single euro zone currency has traded above its 100-day moving average versus the dollar for the first time since late October. It gained on strong German Ifo business confidence figures, although it retreated from the highs after the EU's executive said the euro zone economy is heading into its second recession in just three years.

The executive also said growth in the wider European Union will stagnate, warning that the currency area has yet to break its vicious cycle of debt .

"The move higher in the euro today is valid and reasonable, partly triggered by the German Ifo data and partly due to the Greek bailout agreement early this week. That deal essentially removed a tail risk for the euro zone," said Nick Bennenbroek, head of FX strategy at Wells Fargo in New York.

"But how long can the euro's gains last? My sense is that it will top out between $1.34-$1.35 because the European Central Bank is still expanding its balance sheet which is good for risk appetite but not for the euro."

The euro [EUR=X Loading... () ] was last up 0.6 percent at $1.3312. That was off an overnight session high of $1.33300, which was its strongest level since December 12 on trading platform EBS.

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The key trigger was German data, showing business sentiment rose for a fourth month running in February, raising hopes that Europe's largest economy is improving and will avoid recession despite the problems facing indebted euro zone countries.

The euro as a result broke above a key 100-day moving average around $1.33093 for the first time in 3-1/2 months, and the Feb. 9 high of $1.3322.

One-month implied volatility on euro/dollar dropped to 9.76 percent on Thursday, its lowest since April 22, seemingly suggesting diminishing anxiety about the euro zone debt crisis.

Mark McCormick, currency strategist at Brown Brothers Harriman in New York, said next week's long-term refinancing operation (LTRO) by the ECB should support the euro.

The European Central Bank next week is expected to lend nearly 500 billion euros to banks, although some forecasts go as high as 1 trillion euros.

But a potential fly in the ointment could be Greece once again. Athens may vote on a private sector involvement (PSI) bill that includes a provision to retroactively write down some of its debt on bond holders not participating in the debt swap.

McCormick said uncertainty stemming from the implementation of the PSI and Greek elections should temper euro gains coming from the LTRO, keeping the euro confined to its recent trading range.

More Positive Euro Zone Outlook

The euro zone's economy is bouncing back after a very weak end to last year and positive signals have increased since the last rate decision meeting two weeks ago, ECB President Mario Draghi was quoted as saying on Thursday.

Against the yen [EURJPY= Loading... () ], the single currency rose to 106.900 yen, its strongest since November 9 on trading platform EBS, as the Japanese currency remained under pressure after recent monetary easing. It was last at 106.810 yen, up 0.5 percent on the day.

The dollar [JPY= Loading... () ] fell 0.2 percent against the yen to 80.080, off a seven-month high of 80.406 yen hit on Wednesday.

Analysts said there are still no signs of hitting a peak in dollar/yen just yet and a further rally is expected. The next target would be around 81.63 yen, which is the 61.8 percent retracement of the decline from the April 2011 peak of the 85.530 to the record low at record low hit on October 31.

The dollar [CHF= Loading... () ], meanwhile, fell to a 3-1/2 month low versus the Swiss franc of 0.90350 francs, with traders saying stop-loss sell orders were triggered on breaks below 0.9066 and 0.9050 francs.

The euro [EURCHF= Loading... () ] also fell against the franc to 1.20460 francs after breaking through a reported options barrier at 1.2050 francs. The pair edged nearer to the 1.20 franc floor the Swiss National Bank has pledged to defend.