Euro jumps vs dollar and yen, but may top soon

By Gertrude Chavez-Dreyfuss
NEW YORK | Thu Feb 23, 2012 4:45pm EST


(Reuters) - The euro jumped to a 2-1/2-month high against the dollar and a multi-month high versus the yen on Thursday as solid data on Germany, Europe's biggest economy, offset a bleak economic forecast from the European Commission.

The euro traded above its 100-day moving average on Thursday for the first time since late October after the Ifo think-tank reported that business sentiment in Germany rose for a fourth straight month in February, boosting optimism on the country's economy.

The euro, however, retreated from the highs after the European Commission said the euro zone economy was heading into its second recession in just three years.

The commission, the executive arm of the European Union, said growth in the wider EU will stagnate, warning that the 17-nation single 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," said Nick Bennenbroek, head of FX strategy at Wells Fargo in New York. "That deal essentially removed a tail risk for the euro zone.

"But how long can the euro's gains last?" he added. "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."

In late afternoon New York trading, the euro was up 0.9 percent at $1.33654. It soared to a session high of $1.33747, which was its strongest level since December 12 on trading platform EBS, as it took out stops above $1.3350.

The data on German business sentiment from the Munich-based Ifo think-tank was the key trigger for the euro, raising hopes that the German economy is improving and will avoid recession despite the problems facing indebted euro zone countries.

The euro broke above a key 100-day moving average around $1.33093 for the first time in 3-1/2 months.

The next target would be $1.3435, the 50 percent retracement of the decline from the late October peak to the mid-January trough.

One-month implied volatility on euro/dollar dropped to 9.76 percent on Thursday, the 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 by the ECB should further 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.

A potential fly in the ointment could be Greece once again. Athens may vote on a private sector involvement 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 private sector involvement and Greek elections should temper euro gains coming from the ECB's financing operation, keeping the euro confined to its recent trading range.

Andrew Wilkinson, chief economist at Miller & Tabak Co in New York, said the euro is destined for "bearish euphoria that is bound to feel the pull of gravity," although he said the currency "still appears to have $1.3500 engraved on its front."

Against the yen, the single currency rose to 106.999 yen, its strongest level since November 9 on trading platform EBS. The yen remained under pressure after recent monetary easing. The euro was last at 106.910 yen, up 0.4 percent on the day.

The dollar fell 0.4 percent against the yen to 79.950, off a seven-month high of 80.406 yen hit on Wednesday.

Analysts said there are 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 85.530 to the record low hit on October 31.

The dollar, meanwhile, fell to a 3-1/2-month low versus the Swiss franc of 0.90120 franc. Traders said stop-loss sell orders were triggered on breaks below 0.9066 and 0.9050 franc.

The euro 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.