Tags: Euro Hits Two-Month High | Lifted by Rate-Hike Expectations

Euro Hits Two-Month High, Lifted by Rate-Hike Expectations

Monday, 24 Jan 2011 02:34 PM

The euro rose for a fifth straight session Monday, hitting a two-month high near $1.37 as expectations of higher eurozone interest rates sparked traders to push the currency above important technical levels.

Political turmoil in Ireland again highlighted problems in indebted eurozone countries and a suicide bombing at Russia's biggest airport capped the European currency's rise. 

But the euro gained momentum in the New York session, and traders said tough talk on inflation from European Central Bank President Jean-Claude Trichet on Sunday was a catalyst driving it to its highest level since November.

"They are closer to tightening in the eurozone with a lot less spare capacity, and it is realistic to expect the ECB to tighten before the Federal Reserve," said Kathy Lien, director of research at GFT Forex in New York.

The euro was up 0.3 percent on the day at $1.3655 on electronic trading platform EBS, after climbing as high as $1.3683, its highest since November. Euro gains accelerated after automatic buy orders were triggered at $1.3615 to $1.3620 were breached. Traders said $1.3695, the Oct. 20 low, was the next upside target.

Solid data on eurozone industrial orders and a robust eurozone flash estimate of services purchasing managers activity also bolstered the currency.

The dollar fell 0.3 percent to 82.38 yen while the euro was unchanged at 112.50 yen, just off a two-month high hit in earlier trade and not far from its 200-day moving average.

The euro has rallied some 6 percent in the past two weeks, aided by increasing international support for the eurozone's debt-rescue plan and concerns that higher inflation will prompt a rate rise this year.

The spread between euro zone and U.S. bond yields has widened as a result and boosted the euro, but some analysts are more cautious, arguing that weakness in some member countries, including Ireland, Greece and Portugal, may hold the ECB back from raising rates in the near term.

Irish Prime Minister Brian Cowan resigned as head of the Fianna Fail party at the weekend, sparking political turmoil as for the country as it tries to pass a budget bill to access a bailout from the EU and IMF.

"I don't see how it's possible to raise rates this year given the dire circumstances of the peripheral nations," said Greg Salvaggio, vice president of trading at Tempus Consulting in Washington.

"Eurozone debt issues have gone to the backburner and U.S. municipal financing concerns are front and center," he added. "But the U.S. will outgrow the eurozone this year, and when the focus shifts to growth differentials and eurozone debt issues, that will change."

He said a euro failure to close above $1.3650 on Monday could spark a pullback. The euro retained a key technical level around $1.3570, a 50 percent retracement of its decline from November to early January. Technical analysts say it must hold above that level on a sustained basis to extend its gains.

The euro's broad rally has cleared out short positions, or bets that the shared currency would depreciate. The latest CFTC data show IMM euro positions held by speculators shifted to 4,109 net long contracts last week, versus 45,182 net shorts the previous week.

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