January 26, 2018 / 9:06 AM / in 23 days

FOREX-Euro gains as dollar bounce runs out of steam

* UBS Wealth Management upgrades 6-month forecasts

* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh

By Saikat Chatterjee

LONDON, Jan 26 (Reuters) - The euro jumped more than half a percent higher on Friday as comments by senior U.S. officials this week advocating their support for a weak dollar reverberated through currency markets.

Though U.S. President Donald Trump’s comments on Thursday that he wanted a “strong dollar” contradicted earlier comments made by Treasury Secretary Steven Mnuchin, investors suspect a protracted decline in the greenback may be likely.

“While President Trump has since said that he expects the dollar to get ‘stronger and stronger’, it will be hard for Washington to put the ‘weak dollar’ genie back in the bottle,” Viraj Patel, an FX strategist at ING in London said in a note.

In keeping with the rising theme of expecting more dollar weakness, UBS Wealth Management upgraded its six-month forecasts for the euro and sterling on Friday to $1.28 and $1.45 respectively.

After Trump said on Thursday he ultimately wanted the dollar to be strong, the dollar pared losses against major currencies.

But against a basket of six major currencies, the dollar last traded on Friday at 88.87, after hitting a three-year low of roughly around 88.43. The dollar index has slid more than three percent so far in January and is set for its biggest monthly drop since March 2016.

Some market participants are also concerned that Trump may encourage more protectionist policies at a speech in Davos around 1300 GMT and at a State of the Union speech next week, policies that may ultimately end up pushing the dollar lower.

Against the euro, the dollar’s weakness was the most apparent, with the single currency up half a percent at $1.2465 and not far away from a December 2014 high of above $1.25 hit on Thursday.

With European Central Bank President Mario Draghi declining to lean against the recent euro rally and instead signaling that economic data pointed to “solid and broad” growth, investors were encouraged to push the currency higher.

Draghi also warned that the surge in the euro was a source of uncertainty and said the ECB might have to review strategy if U.S. comments on the benefits of a weak dollar lead to a change in monetary conditions.

“Draghi’s reluctance to offer any resistance to the euro means that euro/dollar is only set to rise more in the coming months,” said Manuel Oliveri, an FX strategist at Credit Agricole in London.

Sterling rose 0.4 percent to $1.4191, but remained well below its peak on Thursday of $1.4346, which was the pound’s highest level since the Brexit vote in June 2016 as some investors turned bullish on the currency’s outlook.

Against the yen, the dollar held steady at 109.42 yen , staying above a four-month low of 108.50 yen struck on Thursday.

Asked about the comments on the dollar by Trump and Mnuchin, Japanese Finance Minister Taro Aso said on Friday that major economies have agreed to avoid targeting currencies for the purpose of trade competitiveness.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Reporting by Saikat Chatterjee, Editing by William Maclean)

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