FOREX-Dollar falls to 14-month low vs euro; Fed looms

Wed Jan 30, 2013 10:33pm IST

* Euro rises above resistance at $1.35, highest since Nov. 2011

* U.S. economy unexpectedly contracts in 4th quarter; Fed statement next

* Yen slide resumes, more losses in store

By Wanfeng Zhou

NEW YORK, Jan 30 (Reuters) - The dollar fell to a 14-month low against the euro on Wednesday after data showed the U.S. economy unexpectedly shrank in the fourth quarter, in contrast to an improving economic outlook in the euro zone.

The euro broke above key resistance at $1.35 and traders said the rally has further to go after recent positive news on the German economy and Europe's banks.

"The momentum has been to buy euros," said Ronald Simpson, managing director of global currency analysis at Action Economics in Tampa, Florida. "Until something changes and everybody runs for the exit, that's going to be the trade now."

The euro rose as high as $1.3579, its strongest since Nov. 18, 2011, according to Reuters data, driven by consistent buying by model funds and momentum accounts. It was last up 0.6 percent at $1.3566.

U.S. gross domestic product fell at a 0.1 percent annual rate, the Commerce Department said, suffering its first decline since the 2007-09 recession and denting hopes the Federal Reserve may end its bond-buying stimulus measure sooner rather than later.

"It's an awful number. This dashes hopes among investors that the Federal Reserve will move away from an ultra-easy monetary policy," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.

"This is a source of weakness for the dollar because it takes away the narrative that the U.S. economy is performing better than the rest of the world."

The Fed concludes its two-day meeting later in the day. While the central bank is expected to keep monetary policy on a steady path, intensive debates continue behind the scenes over when the controversial bond-buying program should be curtailed.

Some analysts, however, said despite a soft headline GDP reading, the details of the report were not as bad. Consumer spending accelerated and business investment rebounded, suggesting some fundamental strength that should help to support the recovery even as Washington tightens its belt.

For euro/dollar, traders noted sell offers in the $1.3575-80 area, while defense of an option barrier at $1.3600 may also limit near-term upside.

Further upside targets are at $1.3640, the high in mid-November, 2011, and $1.3833-35, the 61.8 percent retracement of the move down from May 2011 to July 2012, which also coincides with the July 2011 low.

Euro zone data showed the region's economic sentiment rose for the third month in a row, while European Central Bank policymaker Ewald Nowotny said the recovery was seeping into the real economy.

The dollar rose 0.4 percent to 91.06 yen, having risen to a 2-1/2-year high at 91.40 yen on Reuters data. Traders reported an option barrier at 91.50 yen, which could cap gains in the near term.

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

"We have a forecast of 95 yen for this quarter but even that could be exceeded given the pace of the current moves," said Ian Stannard, head of European FX strategy at Morgan Stanley.

A separate report Wednesday showed U.S. private employers added 192,000 jobs in January, more than economists were expecting, in a sign of growth in the labor market. The data comes two days ahead of the all-important government nonfarm payrolls report.

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