* Euro hits highest since December 2011 just below $1.35
* Yen moves further away from 2-1/2-year low vs dollar
* Fed meeting, U.S. GDP, January payrolls due out this week
By Gertrude Chavez-Dreyfuss
NEW YORK, Jan 29 The euro scaled 14-month peaks
against the dollar on Tuesday, gaining in three of the last four
sessions, lifted by an improving euro zone outlook and
expectations the Federal Reserve will keep its ultra-easy
monetary policy for some time.
German economic data and signs European banks may have
turned the corner boosted hopes that the worst of the euro
zone's crisis was past, driving the euro up 2 percent against
the dollar so far this year.
The euro had earlier rallied to just below $1.35, a key
resistance and psychologically important level. Analysts expect
the level to eventually break, which would open the door to a
rise toward $1.3835.
The focus has also been on the Fed's monetary policy
meeting, which started the first of its two-day gathering on
Tuesday. Investors expect a continuation of quantitative easing
beyond this year, a negative for the dollar as it expands the
"The expectation is that the Fed will continue to pump money
into the financial system and while that's good news for the
stock market, that's bad news for the dollar," said Chris
Gaffney, co-chief investment officer at Everbank Wealth
Management, in n St. Louis, Missouri.
"In contrast, we have the European Central Bank moving to
take away some of those stimulus and effectively, it is on a
tightening path. That has been the difference."
The euro rose as high as $1.3497, the highest since
Dec. 2, 2011. It last traded up 0.2 percent at $1.3485. The
slight increase in a German consumer confidence indicator to 5.8
heading into February from 5.7 the previous month helped the
euro as well, as the data continued the trend of improving
sentiment surveys in the euro zone's largest economy.
Gaffney added that while euro zone fundamentals remained
weak overall, they are being overshadowed by U.S. fiscal
Analysts at ActionForex.com said the euro's intraday bias is
back on the upside and sustained trading above $1.3486 will
extend the whole rally to key resistance at $1.3790. They added
that as long as the $1.3264 support holds, the near-term outlook
should stay bullish.
Action Economics said buying by UK and German names helped
drive the euro's latest move higher, adding that proprietary
names and an Asian central bank are looking to sell near
$1.3500. Defense of the $1.3500 option barrier may also limit
INVESTORS UNWIND LONG BUNDS TRADE
Douglas Borthwick, managing director at Chapdelaine Foreign
Exchange in New York said investors are beginning to feel more
comfortable about long positions on the euro.
"German yields rising should be seen as a good thing in
Europe. It represents an unwinding of the long Germany, short
everything else in Europe trade," Borthwick said. He added that
the euro will continue to rise as long as the two-year euro
currency basis swaps, a measure of funding conditions in the
euro zone, continue to tighten.
The euro briefly rose and hit a session high after data
showed U.S. consumer confidence dropped in January to its lowest
level in more than a year.
Aside from the Fed, investors are also looking out for the
first estimate of U.S. fourth-quarter GDP due on Wednesday, two
days before the January jobs report. Weak readings on the U.S.
economy could add to expectations of continued monetary easing
by the Fed and weigh on the dollar.
The dollar dropped against the yen, slipping further away
from a 2-1/2-year high hit a day earlier, but analysts said yen
weakness will resume as investors look to buy the dollar back at
Traders cited demand for six-month yen puts, or bets the
currency would fall, from a U.S. investor who bet dollar/yen
would rise to 97 yen in six months through option strikes.
The dollar slipped 0.2 percent to 90.64 yen, down
from Monday's high of 91.25 yen, its strongest level since June
2010. Traders reported 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.
Present BOJ Governor Masaaki Shirakawa, whose term ends in
April, is expected to be replaced with a more dovish governor,
who could then bring forward any easing, giving further impetus
to yen bears.