October 25, 2013 / 12:33 AM / 5 years ago

Euro trades near two-year high versus dollar; outlook stays positive

NEW YORK (Reuters) - The euro rose against the dollar on Friday, hovering close to a two-year high, as souring German business morale did little to dent bullish sentiment toward the euro zone common currency.

U.S. one-hundred dollar bills are seen in this photo illustration at a bank in Seoul August 2, 2013. REUTERS/Kim Hong-Ji

German Ifo business sentiment data fell unexpectedly for the first time in six months, sparking concern about the impact of a stronger euro on the region’s exporters.

That followed sub-forecast euro zone private sector activity surveys on Thursday, suggesting that recovery in the euro zone has stalled.

Still, the euro’s fall was minimal and many analysts say it could rise toward $1.40 as investors seek alternatives to a dollar hobbled by expectations the Federal Reserve will maintain its current level of monetary stimulus.

“Traders continue to make the euro their favorite anti-dollar trade in light of expectations the Fed will continue its QE (quantitative easing) program well into the start of next year,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.

In contrast, Schlossberg noted that market participants do not expect any change in the European Central Bank’s monetary policy despite the recent soft euro zone data. That should keep the euro well bid, at least against the dollar, he added.

Next week investors will focus on a Fed policy meeting. The central bank will likely signal it will keep the current size of its bond-purchase stimulus, a negative for the dollar.

After a 16-day shutdown earlier this month, the government is catching up on issuing a backlog of economic data.

The data so far has largely supported the stance that the U.S. central bank should not change its current bond-purchase stimulus, called quantitative easing, to support an economic recovery that has slowed since late summer.

Economists expect Fed policymakers will decide to maintain their $85 billion monthly purchases of Treasuries and mortgage-backed securities when they meet next Tuesday and Wednesday. They projected the Fed would keep this pace of buying until March.

In late afternoon New York trading, the euro was up up 0.1 percent at $1.3808, not far from an earlier peak of $1.3832, its highest since November 2011.

The euro is poised to end the week up nearly 0.9 percent, marking its second straight weekly gain. It has risen 2.1 percent month-to-date, with its annual gain at 4.6 percent.

Currency speculators decreased their bets in favor of the U.S. dollar to the lowest level since February in the week ended October 1, according to data from the Commodity Futures Trading Commission released on Friday.

Some euro zone officials have shown no concern about a strong euro. ECB Executive Board member Joerg Asmussen was quoted on Friday as saying the ECB is not concerned about the level of the euro.

Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington, however, thinks the ECB’s tune on a strong euro could change at some point.

“Euro zone officials are unlikely to sit idly while a rise in the euro threatens to derail a fragile economic rebound,” said Esiner. “Increased vocal opposition to euro strength by policymakers will further limit the currency’s gains.”

Against the yen, the euro was up 0.2 percent at 134.48 yen.

The dollar was flat against a basket of six major currencies at 79.178 .DXY, off a near nine-month low of 78.998. The dollar index’s composition is dominated by the euro.

Economists reckon this month’s 16-day U.S. government shutdown shaved as much as 0.6 percentage point from annualized fourth-quarter gross domestic product through reduced government output and damage to consumer and business confidence.

However, some analysts said the euro could be vulnerable to signs the euro zone’s tentative recovery is losing steam, especially with a strong euro seen hurting the region’s exporters. The euro’s trade-weighted index was at a two-year high.

The dollar slightly pared gains versus the yen after the Japan Meteorological Agency issued a ‘yellow’ warning early on Saturday morning, Japan time, that a small tsunami would reach the Japanese coast at Fukushima, site of a wrecked nuclear power plant, after the U.S. Geological Survey reported a 7.6 magnitude quake 231 miles to the east.

The dollar last traded up 0.1 percent at 97.38 yen, off a two-week low of 96.92 yen, according to Reuters data.

Additional reporting by Gertrude Chavez-Dreyfuss and Wanfeng Zhou; Editing by Nick Zieminski

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