Euro closes in on two-month high

Wednesday, 26 January 2011 00:01 - - {{hitsCtrl.values.hits}}

TOKYO (Reuters): The euro rose near a two-month peak on Tuesday, showing only the barest signs of fatigue after a rally in the past two weeks, as climbing euro zone interest rates prompted speculators to bet on further gains in the currency.

The Australian dollar fell broadly after lower-than-expected consumer inflation data reinforced market expectations that Australia’s central bank will be in no hurry to lift interest rates.

The single currency last traded at $1.3665, having risen as high as $1.3685, just one pip off a two-month peak marked in New York on Monday.

The move brings into play the next major resistance level, at $1.3742, a 61.8 percent retracement of the Nov-Jan fall, and then the euro’s November 22 high of $1.3786.

Underpinning the single currency were growing expectations that the European Central Bank will lift interest rates ahead of the U.S. Federal Reserve, after recent tough talk on keeping inflation in check by ECB chief Jean Claude Trichet.

In contrast, the Fed, more worried about creating jobs, is set to keep a cautious view on U.S. economic recovery after its policy-setting meeting on Wednesday.

That helped to push the yield spread between two-year German and U.S. bonds to its highest level in two years last Friday, at 0.67 percentage point. On Tuesday it remained near that peak, standing at 0.65 percentage point.

Given the euro/dollar’s close historical relationship with the yield spread, some analysts say the euro, which is still only around a two-month high against the dollar, has more room to gain in the near term.