Euro hits 12-week high

Fairfax Media

CURRENCY GAINS: The euro has risen to a 12-week high.

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The euro broke above US$1.3100 to a 12-week high against a broadly weaker US dollar overnight as supportive European data prompted investors to bet the European economy is on a better track compared with the US

The euro's advance started early in the session after a jump in euro zone economic sentiment to a 28-month high and a decline in German unemployment.

This contrasted with recent weak data from the United States that has weighed broadly on the US dollar. Investors are mindful of figures on Friday expected to show slower second quarter growth in the world's largest economy.

The lacklustre US data has reinforced the view benchmark interest rates will remain at record lows in the US well into 2011, while euro-denominated assets still offer higher returns to investors.

Traders cited demand for euros from an Asian central bank in early European trade and they also welcomed news that the Italian government's 25 billion (US$32.54 billion) package of austerity measures cleared a final hurdle. The package is intended to shore up Italy's public finances.

"Economic resilience in Europe... despite the formidable sovereign credit headwinds, continues to fuel an unwinding of bets against the euro and push it higher across the board," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange, in Washington, D.C.

But Esiner warned that while the euro is likely to enjoy continued support over the near-term, especially if US data remains weak, its gains may prove limited if concerns about a slowing US economy widen to include the broader global economy.

In mid afternoon New York trade, the euro was up 0.8

percent at US$1.3091, its strongest since May 4. The single currency briefly traded at US$1.3106.

The euro has risen around 7 percent versus the US dollar this month and the next key resistance level for the single currency is seen at US$1.3125, the 38.2 percent Fibonacci retracement of the peak-to-trough move from November 2009 to June.

CitiFX Technicals said there was a plethora of resistance in the euro/US dollar US$1.3080 and US$1.3115 whch has been pivotal to varying degrees for the last 1-1/2 years

Further bolsterling the euro were investors selling US dollars before the end of the month to hedge the currency exposure on their holdings of US assets, Citibank analysts said.

Euro gains accelerated once the currency went over US$1.3050, a level in which automatic buy-orders were triggered, forcing other investors to unwind bets against the euro to prevent further losses, traders said, a practice known as short covering.

Citibank analysts said investors continued to buy US equities into the end of July as US stock markets outperformed other global equities.

This suggests that investors, on balance. will be net sellers of US dollars to bring their hedges in line with the increased value of their US assets," they said, adding that the signal to sell US dollars was "quite strong".

IN OTHER CURRENCIES

The US dollar fell 0.6 percent against the yen to 86.87 yen.

Southern hemisphere currencies were active with the New Zealand dollar gaining 0.7 percent to US$0.7253. The kiwi recovered from an earlier fall after the central bank raised interest rates by a quarter point, as widely expected, but warned that further hikes could be more gradual.

The New Zealand dollar's recovery was aided by a rise in the Australian dollar, which climbed 1.2 percent to US$0.9008.

Analysts warned however that the gains in the Australian dollar may not last.

Local Australian inflation concerns are probably overblown, said William Reekstin, a director with the global market markets group, Direct Access Partners in New York, and as that realisation increases, the prospect of higher interest rates will fall, reducing the attractiveness of the aussie against its US counterpart.

- Reuters