Euro steady against dollar after hitting 5-week high

The map of Europe is featured on the face of a two Euro coin seen in this photo illustration taken in Rome, December 3, 2011.

NEW YORK (Reuters) - The euro traded unchanged against the dollar on Thursday, after earlier hitting a five-week high, as moves to cover bets against the currency petered out as a Fed induced rally faded.

The Fed on Wednesday pushed back the likely timing of an eventual interest rate hike until late 2014, 18 months later than previously suggested, lifting riskier assets such as the euro. Federal Reserve Chairman Ben Bernanke also said the U.S. central bank was ready to offer additional economic stimulus.

The euro has been prone to bouts of strength for most of the past week as investors scrambled to cover large bets against the single currency amid optimism Greece will reach a deal with its creditors and avoid a disorderly default.

"The last phase of the short-covering likely emerged at the $1.3150 level, and we will probably see a stabilization trade over the next week," said Greg Anderson, G10 strategist at CitiFX, a division of Citigroup in New York.

"The shorts are gone, and while the Fed alleviated some of the tail risk, nothing obvious is tipping the market in one direction right now."

The euro hit a session high of $1.3184 before paring gains to trade at $1.3100, unchanged on the day.

Some analysts saw the euro's early strength driven by data indicating the U.S. economic recovery is gaining traction.

While first-time claims for U.S. jobless benefits rose in the latest week, the underlying trend pointed to improvement in the labor market. The government separately reported orders for U.S. manufactured goods rose more than expected in December.

However, data showing new U.S. home sales unexpectedly fell in December took the steam out of the single currency.

"The main reason why the EUR/USD failed to hold onto all of its earlier gains is because U.S. stocks retreated from their highs and the reason for that was because the second set of U.S. data was not nearly as good as the first," said Kathy Lien, director of currency research at GFT Forex in Jersey City, New Jersey.

The euro hit a five-week high against the yen, but by mid-morning the single currency pulled back. The euro last traded at 101.48 yen, down 0.4 percent, after earlier rising as high as 102.20 yen.

The euro slid against the dollar in afternoon trade as the Fed's rate pledge failed to spark a breach in a key technical level in the pair.

The failure of EUR/USD to breach the 61.8 percent retracement of the $1.3550 high in December to the $1.2624 low on January 13 was behind the euro's drop, according to Brian Dolan, chief currency analyst at Forex.com in Bedminster, New Jersey.

"Also, the dollar's weakness brought on by the Fed's announcement may have been overdone because the central bank yesterday did not come close to committing to QE3," he said. "The dollar's recent weakness was suspicious overall."

The dollar's response to a third round of quantitative easing may be even more measured than was the case following QE1 and QE2. According to CitiFX's PAIN index, a gauge of hedge fund positions, current dollar positioning looks to more closely mirror that seen at the time of QE1 in March 2009 than that surrounding the introduction of QE2.

QE1 saw a greater magnitude of initial dollar decline and the trend toward dollar depreciation was quicker to reassert itself in subsequent months, the firm noted.

GREEK TALKS UNSETTLED

Greek media reported that Greece's private creditors were willing to lower their "final offer" of a 4 percent interest rate on new Greek bonds in order to clinch a deal in time to avert an unruly default. The debt-swap talks will continue on Friday.

In a potentially encouraging sign, however, Italy's 10-year government bond yields fell below 6 percent for the first time in six weeks on Thursday.

"The markets are trading in a way that they believe a disorderly Greek default is unlikely," said Alan Ruskin, head of G10 currency strategy at Deutsche Bank in New York. Still, he noted, "we've seen so many false alarms in terms of resolution."

The dollar slipped 0.4 percent to 77.48, according to Reuters data. Strong technical resistance was cited around the 200-day moving average now at 78.33 yen.

(Additional reporting by Luciana Lopez and Gertrude Chavez-Dreyfuss in New York and Nia Williams in London; Editing by Leslie Adler and Andrew Hay)