January 14, 2011 / 5:36 PM / 7 years ago

FOREX-Euro on pace for best week since mid-2009

* Euro up 3.5 percent this week vs dollar, more gains seen

* Analysts expect $1.35 resistance to hold for euro

* Australian dollar falls after China tightens (Adds comments, option activity, updates prices)

By Wanfeng Zhou

NEW YORK, Jan 14 (Reuters) - The euro headed for its best week in more than 1-1/2 years on Friday and could extend gains after a string of successful securities auctions by indebted euro zone nations calmed fears of the region’s credit crisis.

The euro earlier hit just above $1.3450, edging closer to key resistance at $1.35, its December high. Analysts said the euro’s recovery could continue in the near term, though gains above $1.35 could be difficult given nervousness over the large amount of debt supply from weaker euro zone economies in 2011.

Debt auctions by Portugal, Spain and Italy all saw strong demand this week, which temporarily eased worries about these countries ability to fund their debt. Gains in the euro were also fueled by comments from European Central Bank chief Jean-Claude Trichet, whose warning on inflation raised expectations of rising interest rates. For more, see [ID:nLDE70C1WK]

“The extreme of bearishness is being unwound, but I don’t think we are on the verge of a new round of euro bullishness,” said David Watt, senior currency strategist at RBC Capital Markets in Toronto.

“We still don’t have long-term solutions and it really doesn’t look like EU policymakers are going to come up with any long-term solutions,” he added. “Interest rates in general in the EU periphery are too high and the growth outlook is still relatively weak.”

In midday New York trading, the euro was down 0.2 percent at $1.3328, after having earlier hit a high of $1.3458 on trading platform EBS and crossing above its 100-day moving average at $1.3410.

On the week, the euro was on track for a weekly gain of about 3.5 percent, the biggest since May, 2009.

Technical analysts also highlighted a bearish signal after the 55-day euro/dollar moving average crossed below the 100-day moving average on Thursday.

Karen Anne Jones, technical analyst at Commerzbank, expects the $1.35 level for euro/dollar to hold. “Our favored scenario is for failure ahead of 1.3500 and a slide back to 1.2795, the 61.8 percent retracement of the move seen in the second half of 2010,” she said in a note.

LESS BEARISHNESS

The options market is showing less bearish sentiment on the euro against the dollar.

On Friday, one-month euro/dollar risk reversals, a gauge of market sentiment, traded at -1.25 EUR1MRR=GFI, still with a bias toward euro puts, suggesting more investors are betting the euro will fall than rise. That was up from -1.88 on Monday.

The euro was down 0.1 percent at 1.2861 Swiss francs EURCHF=EBS, off an earlier one-month high of 1.2953. Moves to counter Swiss franc strength should be left to the central bank despite the risks posed to the Swiss economy, a crisis meeting of government, business, bank and trade union representatives agreed on Friday. [ID:nLDE70D1JJ]

The Australian dollar fell 0.8 percent to US$0.9882 AUD=D4 after China raised banks' reserve requirements by 50 basis points, stoking fears of a slowdown in the Chinese economy. Australia's strong trade links with China make it sensitive to Chinese growth expectations. For details, see [ID:nTOE706030]

The euro was flat at 1.2874 Swiss francs EURCHF=EBS, off an earlier one-month high of 1.2953. Moves to counter Swiss franc strength should be left to the central bank despite the risks posed to the Swiss economy, a crisis meeting of government, business, bank and trade union representatives agreed on Friday. [ID:nLDE70D1JJ]

The dollar slipped 0.1 percent to 82.75 yen JPY=. U.S. data on Friday showed a smaller-than-expected retail sales gain and a fall in consumer sentiment. See [ID:nN14146780]

“The data reminds people the Fed won’t be ending its easing program or raising rates any time soon, while the ECB yesterday was talking about inflation. That makes the dollar look really attractive as a funding currency,” said Kathy Lien, director of currency research at GFT in New York. (Additional reporting by Steven C. Johnson; Editing by Andrew Hay)

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