FOREX-Euro resilient near highs, to test ECB's threat on currency

Thu May 8, 2014 3:41am EDT

Related Topics

* Euro stays near two-month high vs dollar as ECB meeting looms

* Spike in money market rates supports euro

* Aussie rises on upbeat local jobs data and China trade data (Recasts, adds comments, details)

By Anirban Nag

LONDON, May 8 (Reuters) - The euro rose against the dollar on Thursday, trading not far from recent two-month highs and buoyed by a rise in overnight money market rates driven by dwindling excess cash in the euro zone.

The single currency has gained over 4 percent in the past six months and the latest trend came ahead of an interest rate announcement by the European Central Bank that was unlikely to make changes to benchmark rates.

The ECB has focused on the euro's strength, warning that a further rise could force it to take drastic measures including quantitative easing, wherein it pumps euros into the system and drives down the currency's value.

While it has not drawn a line in the sand, traders say the ECB gets uneasy when the euro rises towards $1.40. A Reuters poll on Wednesday showed most economists expect ECB action if the euro hits $1.42.

On Thursday, the euro edged up 0.1 percent to $1.3928 , not far from a near two-month peak of $1.3952 hit on Tuesday. On a trade-weighted basket of currencies it was trading near highs seen since mid-March.

Traders said the euro could quickly fall back towards support just under $1.3800 in the event of any policy surprises. But if the ECB stands pat, the common currency could rise to test the $1.40 mark.

"We have seen (ECB President) Mario Draghi use rhetoric to curtail the euro and with limited success," said Jeremy Stretch, head of currency strategy at CIBC World Markets.

"The time has come to walk the talk. If he talks about improving credit conditions and better growth prospects, the euro will nudge towards $1.40 threshold."

The euro has drawn support in recent months from factors such as the euro zone's current account surplus as well as signs of inflows into euro zone assets, including peripheral bonds.

That has kept the euro resilient even in the face of an expected divergence in the outlook for U.S. and European monetary policy, with the Fed in the midst of winding down its massive stimulus while the ECB is expected to keep monetary policy loose or possibly ease further in coming months.

AUSTRALIAN DOLLAR FIRM

The Australian dollar outperformed, getting a boost from data showing that Australian jobs growth beat expectations for a third straight month.

The Aussie dollar rose 0.5 percent to $0.9380, having added to its gains after data showed that Chinese exports and imports both rose slightly in April from a year ago, against forecasts for them to decline.

"You've seen firmer export performance in Korea, Taiwan, Philippines and Malaysia recently," said Greg Gibbs, FX strategist for RBS in Singapore. "So there's a bit of a theme there, consistent with some improvement in the global economic outlook. That certainly supports the Aussie."

In addition, the U.S. dollar has been weak and market volatility has been generally low globally, which encourages trades aimed at benefiting from higher yields, Gibbs said.

The dollar index was at 79.152, not far from a six-month low of 79.06 on Tuesday. It suffered a huge fall on Tuesday, but managed to stabilise after Federal Reserve Chair Janet Yellen offered no surprises in her testimony to Congress on Wednesday.

The dollar eased 0.1 percent to 101.80 yen, holding above a three-week low of 101.43 yen set on Wednesday. (Editing by Richard Borsuk/Mark Heinrich)

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