FOREX-Euro steadies vs dollar, scope for rally to resume

Tue Jan 29, 2013 3:04pm IST

* Euro trades near 11-month high of $1.3480

* Technical resistance seen $1.34869, $1.35

* Dollar slips vs yen but strengthening trend intact

By Nia Williams

LONDON, Jan 29 (Reuters) - The euro hovered within sight of an 11-month high against the dollar on Tuesday and looked poised to extend gains in coming days on growing investor confidence and a brightening outlook for the euro zone.

Strategists said the euro could stall temporarily below strong resistance at the 2012 high of $1.34869, but investors were likely to use any dips as a buying opportunity.

The euro was last close to flat on the day at $1.3456, just off Friday's high of $1.3480, which was the highest level since late February last year. Market players reporting supporting bids at $1.3420-30.

"The trend in euro/dollar is still very much upwards, and I think the market is desperate for a pullback to get a bit more animated about a test of the topside," said Daragh Maher, FX strategist at HSBC.

"There has been a substantial reduction in the tail risks (surrounding the euro zone) and the euro has got momentum."

Maher said if the euro broke through $1.34869 and the psychologically important level of $1.35, the next big target would be the July 2011 low around $1.3840.

The euro has rallied broadly in recent weeks on optimism that the worst of the euro zone crisis is over. It gained a boost late last week on news euro zone banks would repay three-year loans from the European Central Bank early, suggesting parts of the region's banking system are on the mend.

Strategists said reports of portfolio inflows back into the euro zone periphery were lifting the single currency.

Although the euro was expected to continue trending higher, some analysts said gains could be slow as investors waited for euro zone PMI data and U.S. jobs figures later in the week.

YEN SEEN VULNERABLE

The dollar dropped versus the yen on Tuesday but held within sight of a 2-1/2 year high hit a day earlier, while the Australian dollar rose on data showing a rebound in Australian business confidence.

The U.S. dollar slipped 0.3 percent to 90.58 yen, edging away from Monday's high of 91.26 yen, its strongest level since June 2010. Traders reported bids around 90.50 yen and options barriers at 91.50 and 92 yen.

Selling the yen has been mostly a one-way trade since mid-November, based on expectations that Japanese Prime Minister Shinzo Abe would push the Bank of Japan into more forceful monetary easing to beat deflation.

Many market players expected yen weakness to persist over the longer-term, with FX strategists at Morgan Stanley targeting a rise in the dollar to 95 yen.

"Everyone is only thinking about where to buy (the dollar) on dips," said a trader for a Japanese bank in Bangkok.

The euro also slipped against the yen, dropping 0.3 percent to 121.77 yen. It stayed below Monday's high of 122.91 yen, the euro's strongest level against the Japanese currency since April 2011.

The Australian dollar rose 0.4 percent to $1.0457, boosted by a survey showing Australian business confidence rebounded sharply in December. (Additional reporting by Masayuki Kitano/Editing by Chris Pizzey, London MPG Desk, +44 (0)207 542-4441)

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