Euro rises after unexpectedly strong German data

December 15, 2013

Berlin-Germany (Dec 15)  The euro rose to a four-year peak against the yen and gained for a second straight day against the dollar on Friday as unexpectedly robust German business sentiment data raised the appeal of the euro zone common currency. Comments from Federal Reserve officials saying a reduction in stimulus would be discussed at next month's monetary policy meeting failed to boost the dollar.

Analysts said the market has already priced in talk of Fed tapering asset purchases in December, limiting its impact on the greenback. The euro was last up 0.7 percent at 137.28 yen, having risen as high as 137.32, its highest since October 2009. Against the dollar, it gained 0.5 percent to $1.3548.

Germany's Ifo survey of business sentiment rose far more than forecast in November, reaching its highest since April 2012. That added to positive sentiment about growth in Germany, the engine of the euro zone economy. A ZEW survey this week also showed German investor sentiment at its highest in four years, while a purchasing managers index suggested the private sector's expansion was gaining traction.

"The enthusiastic IFO report has investors comfortable increasing exposure to the euro this morning, pushing euro/dollar back above $1.3500," said Scott Smith, senior corporate FX trader at Cambridge Mercantile Group in Calgary. He added that the confidence displayed in Germany during November is positive overall, but noted that recovery in the euro zone's largest economy has failed to bolster the rest of the region, especially the peripheral nations.

Currency speculators raised their bets in favour of the US dollar to the highest in more than two months in the latest week, according to data from the Commodity Futures Trading Commission released on Friday. The value of the dollar's net long position rose to $17.10 billion in the week ended November 19, the largest since the week ended September 10. Long dollar bets stood at $14.46 billion the previous week.

The euro was also supported by comments from European Central Bank President Mario Draghi, who played down the possibility of the bank implementing negative deposit rates. Reports that the ECB would start charging banks to park cash with it overnight had pressured the euro on Wednesday, extending its losses after the release of Federal Reserve minutes later that day suggesting that US stimulus could be scaled back earlier than expected.

After months of misfires, the Federal Reserve's message is finally getting through to Wall Street: to taper is not to tighten. Traders now do not see the Fed raising short-term borrowing costs until at least July 2015, if not later, based on trading in CME Group's fed funds futures.

The euro zone's shared currency also shrugged off comments from ECB Chief Economist Peter Praet that the zone faces deflationary pressures. The dollar showed little reaction to comments from Kansas City Fed President Esther George and Atlanta Fed chief Dennis Lockhart, who both said that the US central bank will discuss scaling back its asset purchases at its December meeting.

BoJ Governor Haruhiko Kuroda said earlier he did not think the yen was at abnormally low levels and he did not see an asset bubble occurring in Japan. The Nikkei and yen have been moving in counter-step for months, with every rally in the share index a signal for speculators to sell the yen. A weaker yen tends to boost Japanese exports and earnings, further supporting shares.

Aaron Smith, managing director at currency hedge fund firm Pecora Capital, said short-term technical factors point toward buying the dollar versus the yen. "We are at a crucial level in dollar/yen. If 101-102 fails, we can see a dive below 100 and resumption of the 300-pip range in the 97-100 region," he said. "However, we are cautiously optimistic that a breakout of further yen weakening is in the cards for 2014." The dollar hit a four-and-a-half-month high of 101.35 yen on expectations Bank of Japan monetary policy would remain loose and a rise in Japanese stocks to six-month highs on Friday. It was last up 0.2 percent at 101.28 yen, according to Reuters data.

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