April 20, 2012 / 6:18 PM / in 6 years

Euro, dollar reaches 2-week peak but gains may fade

NEW YORK (Reuters) - The euro was on pace for its best weekly performance since February on Friday after better-than-expected German business sentiment data, but gains may fade next week as Spain’s finances and the French presidential election become the focus.

The euro also got a boost after a Group of 20 official said the G20 would pledge to increase the International Monetary Fund’s resources by more than $400 billion to fight the European debt crisis.

Spanish 10-year government bond yields, however, topped 6 percent for a third time this week, which could keep the euro constrained within the $1.30-$1.32 range.

“There’s a lot of talk about the IMF and the G20 and the possibility it will get increased resources,” said Tom Fitzpatrick, chief technical strategist at CitiFX in New York.

But he warned of potential headwinds. “Decent price action on any given day doesn’t in and of itself mean anything.”

In mid afternoon New York trading, the euro was up 0.6 percent at $1.3214, having hit a two-week high of $1.3224 after setting off stops above $1.3209. For the week, the euro was up 1.1 percent, on track for its largest weekly gain since February 26.

Still, the euro is within its 3-week neutral range, and it would take a considerable move higher -- above $1.33 -- before the longer-term bear trend came into question, said analysts from TD Securities. “With this in mind, we look for selling opportunities in any squeeze higher,” they said.

Germany’s Ifo survey was the clear catalyst for the euro’s earlier gains, with its business climate index rising to 109.9 in April versus a forecast of 109.5.

The report was the latest sign the euro zone’s largest economy continues to outpace debt-ravaged southern states and highlighted divergences within the currency bloc.

Concerns about Spain’s deficit, banking sector and poor growth outlook have mounted in recent days, raising the possibility Spanish yields could rise to 7 percent -- an area many see as a tipping point into unaffordable borrowing costs.

A firm break below $1.30 would eventually open the door to a test of the euro’s 2012 low at $1.2624.

Most analysts, however, expect the euro to remain range bound ahead of Sunday’s first round of the French vote. Financial markets were nervous the policies espoused by the expected eventual winner, Socialist Francois Hollande, could be detrimental to the economy.

Hollande wants to slap a 75 percent tax rate on income over 1 million euros, a policy he intends to keep in place for many years.

“The policies that Hollande will introduce are viewed as aggressive and anti-economy. That could have a negative growth dynamic for France, and at the moment Europe doesn’t need any of that,” said Citi’s Fitzpatrick.

The second round of the French election takes place May 6, the same day as a Greek election and before an Irish referendum on the fiscal compact on May 31, leaving the euro vulnerable.

While no dramatic shift is expected, investors will also be watching the statement from a two-day Federal Reserve policy meeting on Wednesday for clues on the U.S. economic outlook.

Weaker-than-expected U.S. data and expectations of more monetary easing from the Bank of Japan next week has left investors reluctant to sell the euro aggressively against the dollar or yen.

The yen hovered close to its lowest levels against the dollar in ten days after Bank of Japan Governor Masaaki Shirakawa said the central bank would continue powerful monetary easing until a 1 percent inflation target is in sight.

His words reinforced expectations the bank will ease policy further at its April 27 meeting.

The dollar stood at 81.58 yen, bringing its April 10 peak of 81.85 yen into focus. The euro hit a 2-week high of 108 yen, and was last at 107.77 up 0.5 percent on the day and well up from Monday’s two-month trough.

Sterling hit a 5-1/2month high against the dollar after strong UK retail sales data doused faint expectations of more monetary stimulus by the Bank of England. The British pound was last at $1.6117, up 0.4 percent.

Reporting By Nick Olivari and Gertride Chavez-Dreyfuss; Editing by Andrew Hay

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