January 20, 2011 / 2:57 PM / 9 years ago

FOREX-Dollar gains vs euro as jobless claims fuel demand

* Dollar buoyed by big decline in U.S. jobless claims

* Market gives EU leaders time to resolve debt problems

* Euro helped by yield advantage, rising lending rates

* Stellar China GDP stokes rate-tightening speculation

(Rewrites lead, updates prices, adds quotes, detail, changes byline)

By Julie Haviv

NEW YORK, Jan 20 (Reuters) - The dollar gained against the euro on Thursday as stronger-than-expected U.S. labor market data buoyed demand for the greenback, but growing confidence in Europe’s ability to defuse its debt crisis should limit gains.

High unemployment and a lackluster housing market are the biggest obstacles to the U.S. economy’s recovery. The path of U.S. Federal Reserve monetary policy largely relies on labor market conditions, so signs of improvement tend to increase expectations of higher interest rates.

U.S. initial jobless claims fell more than expected last week and showed their biggest decline since February. For details, double-click on [ID:nN19241129]

The greenback rose as high as 82.69 yen, the day's peak, on electronic trading platform EBS from 82.36 yen JPY=EBS before the data.

The euro EUR= fell 0.1 percent against the dollar to $1.3452, according to Reuters data, after hitting a two-month high on Wednesday of $1.3539.

Sentiment lately has favored the single currency, with the dollar underperforming the euro in seven of the past nine sessions. The euro is up 0.5 percent so far this year, largely because of persistent demand from sovereign accounts, as investors give euro-zone officials time to make progress on finding a sustainable solution to its debt crisis.

Investors have grown more optimistic that EU officials could finally be working on a plan to address debt problems in the bloc’s peripheral countries.

Officials are said to be mulling a plan that would allow the European Financial Stability Facility (EFSF), the bloc’s bailout fund, to directly purchase or help finance the purchase of government debt from troubled euro-zone nations.

“Concrete efforts by EU officials to get ahead of the bloc’s debt crisis could meaningfully improve the single currency’s outlook and help it sustain and even add to its recent gains,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

“However, until such steps are taken by euro zone policymakers, the euro’s rally is likely to be viewed as lacking sustainability,” he said.

The Financial Times Deutschland on Thursday said euro-area finance ministers discussed a plan to ease pressure on Greece by allowing it to buy back its own debt using credits from the EFSF. [ID:nLDE70J0CB]

“The markets remain fairly calm and are giving the euro-zone authorities the benefit of the doubt for now, buying the euro on the back of its favorable yield differential relative to the dollar,” said Kathleen Brooks, research director at FOREX.com.

Key euro-priced bank-to-bank lending rates rose on Thursday, as markets continued to digest last week’s inflation warning from the European Central Bank, lending support to the euro. [ID:nLDE70J0UO]

Technical analysts said the single currency would be supported around $1.3435, its 100-day moving average, while upward resistance was seen at $1.3570, the 50-percent retracement of the euro’s November-to-January slide.

European stock markets took a cue from selling in Asian equities, after data showing stellar economic growth in China in 2010 fueled speculation that Beijing may come under more pressure to tighten monetary policy. [ID:nTOE70J02S]

Analysts said risk appetite was tempered as investors waited to see how a visit by Chinese President Hu Jintao to the United States may affect Beijing’s policy of holding down the value of the yuan. [ID:nN19294126]

Higher-yielding currencies, including the Australian AUD=D4 and Zealand dollars NZD=D4, were the day's biggest losers, falling 1.2 percent and 1.5 percent versus the dollar respectively.

The Australian dollar is particularly sensitive to the performance of the Chinese economy as Australia is a major supplier of natural resources to China. Speculation of higher Chinese rates tends to weaken the Aussie as such action would cool growth, decreasing demand for resources.

The dollar rose 0.1 percent versus a currency basket to 78.739 .DXY from a two-month low of 78.303 hit on Wednesday.

Data on U.S. December existing home sales to be released at 10:00 a.m. [1500 GMT], expected to show an increase month over month of 4.8 percent, may sway U.S. dollar sentiment. (Additional reporting by Neal Armstrong in London; Editing by Padraic Cassidy)

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