Case for steadier euro grows after third week of gains

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The euro edged higher on Friday, putting it on course for a third straight week of gains, its best performance in just under a year against a dollar weakened this week by some softer U.S. economic numbers.

A far stronger than expected reading of Germany's economic growth in the fourth quarter helped maintain a recent feeling of greater stability around the single currency.

Three weeks of turmoil over Greece's financing and future in the euro zone have done little to shake the euro itself. At $1.1354 on Friday, it is up almost 3 percent over that period.

"It is really telling that all of this debate around Greece has not sent the euro spiraling lower," said Simon Derrick.

"It is all very tentative and based on nothing more than the price itself rather than any deeper economic analysis, but there is just the feeling that maybe the euro is beginning to make back some ground."

Like most major bank analysts, Derrick has predictions of the euro falling back towards parity with the dollar over the next year or so.

Positioning still appears massively weighted towards more gains for the dollar and the running assumption has been that any rally for the euro only allows dollar bulls to take profit and reload in favour of another rush of gains.

The longer the euro resists another plunge, however, the more temptation there will be to take more of the profit on such positions built up in recent months. Helped by the German numbers it was up 0.25 percent at $1.1430 early on in Europe.

"Have we got this wrong, I don't know," Derrick said. "I return to the flow data and what it tells me is that since the announcement of quantitative easing, we have seen inflows to euro zone sovereign paper."

Dollar lull

The dollar index was down at 85.42 after hitting a one-week low of 93.979 overnight. The index had reached a two-week peak of 95.115 on Wednesday.

The dollar also slipped to 118.97 yen, knocked down from a five-week high of 120.48 touched on Wednesday.

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"The slide showed that dollar/yen had become top-heavy and the market was simply unable to sustain earlier gains," said Koji Fukaya, president of FPG Securities in Tokyo.

"The dollar still looks well supported, after all U.S. fundamentals ... remain relatively strong."

Germany, France, Russia and Ukraine agreeing late on Thursday to a ceasefire between Ukrainian forces and Russian-backed separatists also shored up the euro.

Greek bond prices were also sharply higher after the European Central Bank further raised a cap on emergency funding for Greek banks by about 5 billion euros to 65 billion euros.

Unable to reach an understanding this week, Greece and euro zone finance ministers will attempt again to bridge their differences at a meeting on Monday.

"The media may precede the meeting with headlines and news. Also, with the March debt repayment deadline looming it is hard to imagine Greece staying still. It may float trial balloons to test responses by the 'troika','' said Masashi Murata, senior currency strategist at Brown Brothers Harriman in Tokyo.

"So something could take place over the weekend. It might be difficult to short the euro after its bounce, but riding the rise any further requires second thought as well.''