Euro breaks above $1.31 for first time since May

NEW YORK (Reuters) - The euro rallied above $1.3100 to a 12-week high against a broadly weaker dollar on Thursday as supportive European data prompted investors to bet the European economy is on a better track compared with the United States.

The euro's advance started early in the global 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 dollar. Investors are mindful of figures on Friday expected to show slower second- quarter growth in the world's largest economy.

The lackluster U.S. data has reinforced the view benchmark interest rates will remain at record lows in the United States 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-euro ($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 U.S. data remains weak, its gains may prove limited if concerns about a slowing U.S. economy widen to include the broader global economy.

In late afternoon New York trade, the euro was up 0.7 percent at $1.3077. The single currency briefly traded at $1.3106, its strongest since May 4.

The euro has risen around 7 percent versus the dollar this month.

The next key resistance level for the single currency is seen at $1.3125, the 38.2 percent Fibonacci retracement of the peak-to-trough move from November 2009 to June.

RESISTANCE GALORE

CitiFX Technicals said there was a plethora of resistance in the euro/dollar $1.3080 and $1.3115, which has been pivotal to varying degrees for the last 18 months.

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

Euro gains accelerated once the currency went over $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 U.S. equities into the end of July as U.S. stock markets outperformed other global equities.

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

YEN, KIWI AND AUSSIE RISE

The dollar fell 0.6 percent against the yen to 86.85 yen. It traded in a range of between 87.51 and 86.58.

Southern Hemisphere currencies were active, with the New Zealand dollar gaining 0.4 percent to $0.7238. 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 1.1 percent to $0.9006.

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

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

(Reporting by Nick Olivari and Vivianne Rodrigues; Additional reporting by Naomi Tajitsu in London; Editing by Jan Paschal)