FOREX-Euro hits two-month high vs dollar as fears wane
* Euro rises to 2-mth high, takes out key Fibonacci level
* German IFO, expectations of euro zone safety fund help
* Dollar index drops to two-month low
* Spain has plans for savings banks, Portugal vulnerable (Adds quotes, updates prices, details, background)
By Julie Haviv
NEW YORK, Jan 21 (Reuters) - The euro rose to a two-month high against the U.S. dollar on Friday in a leap past key technical resistance that may extend its two-week-long rally on waning fears over Europe's debt crisis.
Expectations of a strengthened euro zone rescue fund and a strong German Ifo business confidence report supported the euro, along with a more hawkish outlook from the European Central Bank recently.
The euro breached the 50 percent Fibonacci retracement at around $1.3570, hitting session highs at $1.3577 EUR=EBS on electronic trading platform EBS. It was last at $1.3576, up 0.7 percent.
The single currency, which outperformed the dollar in eight of the past 10 sessions, was buoyed by Asian sovereign demand, improving confidence in the euro zone, and a stronger-than-expected German Ifo survey. [ID:nBAE003872].
Traders said the market is now focused on taking out the $1.3600 options barrier.
"Markets are clearly buying into the view that the European debt crisis is being resolved with modest pain," said Steve Englander, head of G10 strategy at CitiFX in New York.
The euro's gains are justified given how bank equity prices, credit spreads and rate differentials have moved, he said.
"If anything the euro move may be somewhat on the modest side," he said. "It also seems that many investors were caught (as we were) by the sudden shift in investor sentiment, but there is nothing inconsistent in the euro move given this improvement."
The surge in the euro versus the dollar coincided with the rise of the euro zone common currency against sterling after Bank of England policymaker Adam Posen -- a known dove among BoE policymakers -- said the fact that the market was pricing in rate increases did not mean they would occur. For more see [ID:nLAJ002449].
The euro's rally helped to knock the dollar index down 0.7 percent to 78.296 .DXY, a two-month low.
Against the yen, the dollar lost 0.4 percent to 82.62 yen JPY=.
But, not everyone contends the euro is safe right now.
NOT A SURE BET
Jason Polit, a certified financial analyst at Charles Schwab Private Client in Phoenix, said the strength of the euro has been based on confidence rather than tangible resolutions to the euro zone's debt crisis, leaving the euro vulnerable.
"The situation in Europe is still largely unresolved," he said. "Some sort of bailout for one or more of the peripheral economies will likely occur eventually and that will put downward pressure the euro."
Polit, who manages around $235 million in assets for clients, said he has rebalanced portfolios, reducing allocations in emerging markets and focusing more on developed markets with manageable debt levels, such as Germany.
"It is best to stay guarded with so many questions still unanswered about the euro zone," he said.
The euro rose to five-week highs around 112.24 yen EURJPY=R, making a technical break above a closely watched Japanese indicator, the Ichimoku cloud, in the 112 yen area. A daily close above the cloud would give the euro potential to rally further.
The euro has gained nearly 1.5 percent against the dollar since the start of year, driven by growing expectations euro zone policymakers will arrive at a more durable solution to the peripheral debt crisis and a hawkish ECB which last week warned about price pressures.
Still, doubts remain whether the euro can hold gains.
"This euro reaction seems overdone as it's highly unlikely the ECB will raise rates soon and there's been nothing concrete on the rescue fund," said Raghav Subbarao, currency strategist at Barclays Capital.
"We think Portugal will have to be bailed out eventually. After that the euro can rise further as Spain we believe is solvent, but the euro rally is not sustainable here," he added.
Spain is planning to force its regional savings banks to become conventional banks and seek stock market listings, a source familiar with the matter told Reuters. [ID:nLDE70K0A4]
Spanish government bond yields fell, with the spread over German Bunds narrowing to its tightest since mid-November, while Portuguese bond spreads also came in. (Additional reporting by Gertrude Chavez-Dreyfuss in New York, Neal Armstrong and Anirban Nag in London; Editing by Andrea Ricci)
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