Euro rallies vs dollar as data revives risk appetite

By Steven C. Johnson

NEW YORK (BestGrowthStock) – The euro gained more than 1 percent against the dollar on Thursday as strong euro zone economic data and U.S. corporate earnings rekindled hopes for the world economy and whetted investor appetite for risk.

The euro rose above $1.29 after data showed surprisingly robust growth in European manufacturing and services, but uncertainty ahead of Friday’s European bank stress test results prevented a retest of a recent 10-week high above $1.30.

The yen erased gains against the dollar and dropped sharply against other currencies as U.S. stocks (Read more about the stock market today. ) rallied, improving market sentiment a day after Federal Reserve Chairman Ben Bernanke painted a gloomy outlook for the U.S. economy.

Analysts said weak U.S. data lately has forced investors

to reconsider their assessment of U.S. economic might, especially as euro zone data has held up better than expected considering Europe’s debt crisis and the raft of fiscal austerity measures being implemented by governments with weak public finances.

“We’re seeing a struggle between perception and reality, as data from Europe has been better than anticipated while what we’ve seen from the U.S. has been quite soft,” said Dean Popplewell, chief strategist at FX brokerage OANDA in Toronto.

“The euro’s had a hell of a bounceback, and it’s testing the conviction of euro bears, who were touting its downfall when it fell below $1.19 last month,” he said.

The euro was last at $1.2906, up 1.2 percent, and 112.20, up 1 percent. The dollar was off 0.1 percent at 86.96 yen, above a session low of 86.35 yen.

High-yielding, commodity-linked currencies such as the Australian dollar and the Canadian dollar also rose sharply against the greenback as risk appetite recovered.

The dollar has struggled as weak U.S. economic data has dashed market expectations of a Fed interest rate rise in 2011. That has prompted investors to reassess expected returns on dollar-denominated assets.

The yield on two-year U.S. Treasuries fell to a record low 0.57 percent earlier this week, more than 10 basis points below the yield on comparable German debt.

Investors were cheered, however, by data on Thursday showing U.S. existing home sales fell 5.1 percent in June, , less than the 8.1 percent decline expected in a Reuters poll.

STRESS TESTS LOOM

James Chen, chief technical strategist at FX Solutions, said the euro’s tentative break above $1.29 resistance suggests further gains ahead. “If another attempt at a $1.30 breach takes place, key upside resistance on such a bullish move resides in the significant $1.31 price region,” he said.

For now, Popplewell said investors were reluctant to bid the euro much higher ahead of the stress test results, which are due for release on Friday.

The euro has had a good run against the dollar in anticipation of the test results as traders bet most of the 91 European banks being examined would pass.

Some say the test results could be positive for the euro if they reveal no unpleasant surprises, but doubts linger about whether the checks are tough or transparent enough.

“The market has certainly bought the rumor going into this week that the stress tests will be positive and people have been going long euro/dollar,” said Lauren Rosborough, currency strategist at Westpac.

In the longer run, Popplewell said underlying problems in the euro zone will stall the currency’s upward momentum, as will doubts about the severity of the stress tests.

“But if the market buys into these tests for now, we will certainly see the euro trade higher,” he said.

Stock Market Today

(Additional reporting by Wanfeng Zhou)

(Editing by Theodore d’Afflisio)

Euro rallies vs dollar as data revives risk appetite