Euro bounces as Ireland risk eases

SYDNEY (Reuters) - The euro rose against other major currencies and looked to stay buoyant in Asia on Friday with worries about Ireland’s debt crisis diminishing, while commodity currencies outperformed as the mood lifted.

United States money printing plates are seen at the Museum of American Finance in New York October 15, 2010. REUTERS/Shannon Stapleton

Still, analysts warned the euro is not out of the woods yet with Ireland’s debt troubles threatening to spillover to other highly-indebted peripheral euro zone countries like Portugal.

There is also uncertainty whether China will adopt more stringent measures to keep a lid on inflation, including a drastic rise in key interest rates.

All of which sets the scene for what could be a choppy ride into the weekend. For now though, the euro clung on to most of the overnight gains, trading at $1.3646, up more than 1 percent from this week’s low around $1.3446.

The single currency still needs to get above the $1.3750/1.3785 resistance are to put an end to the downward correction of the last couple of weeks.

Against the Japanese currency, the euro was near 134.00 yen, recovering from a fall to 112.23 yen on Tuesday.

Upbeat U.S. economic data, including a drop in a closely watched gauge of jobless benefits to a two-year low, helped drive the dollar to a six-week high of 83.78 yen.

It last traded at 83.45 yen, finding the going tough above the session high, which also represents the 61.8 percent retracement level of the September to November fall.

A convincing break of the topside could see the dollar retest 84.20 before reclaiming 86.00 yen, highs last seen in mid-September.

Sparking hopes of imminent aid for Ireland’s shattered banks, central bank governor Patrick Honohan said he expected Dublin to receive tens of billions of euros in loans from European partners and the IMF to provide stand-by funds.

“It feels like we’re getting closer to some sort of resolution ... so that’s certainly seen euro get a better tone,” said Grant Turley, strategist at ANZ.

“People are waiting to see what shape or form the package might entail.”

Heathly bids for Spanish bonds at a sale on Thursday further helped settle nerves, triggering a rally in European and U.S. stocks. It pushed Wall Street's favorite pluse of investor anxiety, the CBOE Volatility Index .VIX, down nearly 14 percent.

The improved risk sentiment helped commodity prices recover from the recent fall and gave commodity currencies like the Australian dollar a shot in the arm.

The Aussie dollar rose as high as $0.9906, up nearly 2 percent from this week’s low of $0.9725. But it was still some 3 percent below the 28-year peak around $1.0183 set earlier in the month. It last traded at $0.9897.

Citi analysts said they remain optimistic on commodity currencies.

“Fears on tightening in China have provided short-term headwinds to this view, but we do not envision a significant slowing in the Chinese economy,” they wrote in a client note.

“Thus we doubt that the tightening will upset commodity prices any further or spark a bigger bout of risk aversion that would benefit the USD.”

Editing by Wayne Cole