Euro rallies but limited traction seen

Monday, 6 December 2010 00:01 - - {{hitsCtrl.values.hits}}

New York (Reuters): The euro rose for a third straight day on Friday after falling more than 7 percent last month, though analysts say it’s unclear whether it will extend its gains next week.

The euro’s gains on Friday accelerated after data showed the U.S. economy added fewer jobs than expected in November, driving the jobless rate up to 9.8 percent.

It was also the second-largest one-day decline in the .DXY since May 2009.

The euro rose 1.5 percent to $1.3414 on Friday, capping off its best three-day performance since May. It hit a 2-1/2-month low beneath $1.30 on Tuesday.

Traders said European Central Bank’s purchases of Irish and Portuguese debt this week helped support the euro.

But with a light U.S. economic data calendar next week, analysts said lingering euro zone debt worries could weigh on the euro again next week. European authorities may have bailed out Ireland, but investors are still worried about the next euro-area country to require assistance.

“The strong rally in the euro we have seen in recent days will likely fizzle out next week,” said Greg Anderson, G10 strategist at Citigroup in New York. “There are few drivers left in the market.”

Elsewhere, the U.S. dollar fell to a 2-1/2-week low at 82.53 yen. It was last at 82.57, down 1.6 percent.

If investors start to worry anew about the strength of the U.S. economy, the euro could sustain its recent gains. The unexpectedly weak U.S. employment report on Friday unnerved some investors.

Also weighing on the dollar were reports that Federal Reserve Chairman Ben Bernanke said in an interview to be aired on CBS-TV on Sunday that markets should not dismiss the possibility of the central bank buying more than $600 billion in bonds to boost U.S. growth.

The Fed announced its second round of bond buying last month, though recent signs of U.S. economic strength had sparked some speculation it could spend less than the allotted $600 billion.

In the options market, recent negative sentiment on the euro turned about two days ago and is currently neutral, noted David Tien, a director at Credit Suisse’s Global Algorithmic Strategy and Modeling group in New York.

“Looking ahead to late 2010 and early 2011 we see potential for a temporary stabilization in the euro and even some corrective strength, to as high as $1.37-$1.38,” said Nick Bennenbroek, head of currency strategy at Wells Fargo.

“The medium-term outlook for the euro remains challenging however,” he wrote.