Euro & AUD rally pauses ahead of China data rush

SYDNEY Wed Oct 17, 2012 6:31pm EDT

SYDNEY (Reuters) - The euro and Australian dollar hovered at multi-week highs on Thursday, but could see a setback in their two-day rally if a slew of economic reports on China renew worries about the health of the world's second biggest economy.

Due around 0200 GMT, the data is expected to show China's economy likely slowed for a seventh straight quarter, missing the government's target for the first time since the depths of the global financial crisis.

But any upside surprises could see investors take on even more risk. The market is already buoyed by talk of a credit line for Spain and Moody's decision to maintain the country's investment grade rating for now.

The euro stood at $1.3116, having risen about 0.5 percent on Wednesday to as far as $1.3140 -- a high not seen since mid-September. Initial resistance is pegged at the September 17 peak around $1.3173, followed by the May high of $1.3284.

"The EURUSD has made significant headway in the past two days, climbing over 200-pips since the close on Tuesday and now within reach of the post-QE3 announcement high of 1.3170/75," said Christopher Vecchio, Currency Analyst at DailyFX.

"The rally, in no small part, has been fuelled by hopes for a Spanish bailout."

Markets are also keeping an eye on Thursday's bond sale by Spain, which is looking to raise up to 4.5 billion euros in the debt market.

A two-day summit of euro zone leaders starting Thursday will be closely watched as well. Officials will debate steps towards a single banking supervisor and proposals for closer euro zone integration. However, market expectations for any major announcements are low.

Investors also snapped up the Australian dollar, driving the commodity currency to a 2-1/2 week high of $1.0389, taking total gains in the past two sessions to 1.3 percent.

Having survived a fall to $1.0145 earlier this month, the recent rally could see the Aussie retest $1.0500 and even the September peak of $1.0624.

Further supporting risk appetite, U.S. data on Wednesday showed groundbreaking on new U.S. homes surged in September to its fastest pace in more than four years, a sign the housing sector's budding recovery is gaining traction.

These developments saw the market give safe haven currencies, including the U.S. dollar and yen, a wide berth.

The dollar index .DXY fell to 79.068, having touched a one-month trough of 78.935. It is now within striking distance of the September 14 low of 78.601. A break there would take the index back to lows not seen since February.

Against the yen though, the dollar rose to a one-month high of 79.11. Traders said a sharp rise in U.S. Treasury yields on the back of the upbeat housing data helped make the dollar more attractive versus the yen.

"The broad USD is battling between its use as a funding currency to invest in emerging markets, and a rise in its value linked to higher yields and growth expectations. For now this translates into a higher USD/JPY as the most yield sensitive currency," analysts at Societe General wrote in a client note.

(Editing by Wayne Cole)

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