Euro hits 8-wk high vs dollar as debt fears wane
NEW YORK: The euro rallied to an eight-week high against the dollar on Wednesday on growing hopes euro zone officials will navigate the sovereign debt crisis, with further gains seen if key levels are sustained.
The euro rose on reports of Asian sovereign buying and continued short-covering, while traders pushed the single currency above a key technical level.
The euro, shared by 17 countries, climbed more than 1 per cent to hit an eight-week high of $1.3538, according to Reuters data and last traded at $1.3504.
The euro could extend gains in the weeks ahead on hopes that policymakers would prevent a debt crisis that has engulfed Greece and Ireland from spreading.
"People are very impressed with the determination of European officials and are expecting them to successfully deal with the sovereign debt crisis," said Steven Englander, head of G10 strategy at CitiFX in New York.
"The ramped-up rhetoric is having an impact, but that tends to be temporary. So at some point in the first quarter, investors are going to be looking to see if this determination translates into concrete action," he added.
Front-end euro/dollar volatility has remained subdued in the last few days, settling between the 12.0 per cent to 13.0 per cent range.
On Wednesday, one-month volatility on the currency pair traded at 12.55 per cent, sliding from as high as 14.0 per cent at the beginning of the year.
Current levels suggested options investors have become less nervous about the debt crisis and do not expect any major hiccup in the region over the next 30 days.
For a second straight day traders also cited significant covering of bearish euro/dollar trade structures and strong interest to sell eur! o/dollar volatility.
The euro brushed off a German newspaper report that the government was considering a plan to allow Greece to buy back its own debt using a euro zone crisis fund. Athens and Berlin denied the report.
The currency was supported as the German government raised its forecast for 2011 economic growth Wednesday following a strong reading of economic sentiment the previous day.
Comments from the European Central Bank last week, which highlighted near-term inflation pressures, have sparked talk of an earlier-than-forecast rate rise.
Euribor rates rose further, reflecting higher interest rate expectations.
Tom Fitzpatrick, head of technical analysis at CitifX in New York, said a close above $1.35 would indicate further upside for the euro over the next couple of weeks.
The euro's next upside target lies at $1.3571, the 50 per cent retracement of its November to January slide. The euro's gains have helped push the dollar index to an eight-week low of 78.334, down 0.7 per cent. It last traded at 78.442.
Despite the euro's gains, some analysts were concerned that European measures to tame the debt crisis were stalling and may limit further euro gains.
"There was some optimism that the euro zone structural problems were on the way to being sorted, but there may have been a bit of a reassessment of that," said Jeremy Stretch, currency strategist at CIBC.
Investors have been encouraged over the past couple of days, however, as Russia joined China and Japan in expressing interest in buying new bonds from the European Financial Stability Facility rescue fund.
The euro briefly rallied to a one-month high against the Swiss franc of 1.2994 francs ah! ead of a press conference by the Swiss government. Some traders speculated that officials may try to talk down the Swiss currency.
It retreated after the economics minister said he was concerned about the currency's strength, while adding that Swiss exporters were not yet in a crisis due to a strong franc.
The euro rose on reports of Asian sovereign buying and continued short-covering, while traders pushed the single currency above a key technical level.
The euro, shared by 17 countries, climbed more than 1 per cent to hit an eight-week high of $1.3538, according to Reuters data and last traded at $1.3504.
The euro could extend gains in the weeks ahead on hopes that policymakers would prevent a debt crisis that has engulfed Greece and Ireland from spreading.
"People are very impressed with the determination of European officials and are expecting them to successfully deal with the sovereign debt crisis," said Steven Englander, head of G10 strategy at CitiFX in New York.
"The ramped-up rhetoric is having an impact, but that tends to be temporary. So at some point in the first quarter, investors are going to be looking to see if this determination translates into concrete action," he added.
Front-end euro/dollar volatility has remained subdued in the last few days, settling between the 12.0 per cent to 13.0 per cent range.
On Wednesday, one-month volatility on the currency pair traded at 12.55 per cent, sliding from as high as 14.0 per cent at the beginning of the year.
Current levels suggested options investors have become less nervous about the debt crisis and do not expect any major hiccup in the region over the next 30 days.
For a second straight day traders also cited significant covering of bearish euro/dollar trade structures and strong interest to sell eur! o/dollar volatility.
The euro brushed off a German newspaper report that the government was considering a plan to allow Greece to buy back its own debt using a euro zone crisis fund. Athens and Berlin denied the report.
The currency was supported as the German government raised its forecast for 2011 economic growth Wednesday following a strong reading of economic sentiment the previous day.
Comments from the European Central Bank last week, which highlighted near-term inflation pressures, have sparked talk of an earlier-than-forecast rate rise.
Euribor rates rose further, reflecting higher interest rate expectations.
Tom Fitzpatrick, head of technical analysis at CitifX in New York, said a close above $1.35 would indicate further upside for the euro over the next couple of weeks.
The euro's next upside target lies at $1.3571, the 50 per cent retracement of its November to January slide. The euro's gains have helped push the dollar index to an eight-week low of 78.334, down 0.7 per cent. It last traded at 78.442.
Despite the euro's gains, some analysts were concerned that European measures to tame the debt crisis were stalling and may limit further euro gains.
"There was some optimism that the euro zone structural problems were on the way to being sorted, but there may have been a bit of a reassessment of that," said Jeremy Stretch, currency strategist at CIBC.
Investors have been encouraged over the past couple of days, however, as Russia joined China and Japan in expressing interest in buying new bonds from the European Financial Stability Facility rescue fund.
The euro briefly rallied to a one-month high against the Swiss franc of 1.2994 francs ah! ead of a press conference by the Swiss government. Some traders speculated that officials may try to talk down the Swiss currency.
It retreated after the economics minister said he was concerned about the currency's strength, while adding that Swiss exporters were not yet in a crisis due to a strong franc.
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