The euro's latest rise has provided only minimal support to euro zone government bonds, currently in the grip of a powerful bear market, though it may temper recent bets on a more aggressive rate hike campaign.
Unlike the euro's previous bouts of strength when the economy was weak, growth is now on a much more solid footing, as recent data has shown, while the European Central Bank has expressed heightened concern over rising inflationary pressures.
Analysts say any growth-dampening effect a robust currency has, by making euro zone exports more expensive, should help the European Central Bank in its efforts to guide the economic expansion and consumer prices along a sustainable path.
This will be cold comfort to bond investors, as it is unlikely to bring a halt to the ECB rate hikes that helped inspire this year's exodus from fixed income - even if it keeps the bank from accelerating its monetary tightening.
Given recent speculation the ECB may step up its rate rises by delivering an aggressive 50 basis point increase in June, analysts say the muscular euro may come to the defence of interest rate doves who would prefer a quarter-point hike.
"Maybe it could tip the balance between a 25- and 50-basis point hike in June but it is not a strong argument for them to change their thrust," said Christoph Rieger, interest rate strategist at Dresdner Kleinwort Wasserstein.
"We know that the ECB Governing Council is split. There is a dovish and hawkish camp - one that wants 25 and one that wants 50 - and the hawks still don't have the majority."
Based on a broad measure of currency strength, analysts at Dresdner Kleinwort Wasserstein figure the euro's rise this year already has had the effect of about 45 basis points worth of monetary tightening in addition to ECB hikes.
The euro's latest surge to 1-year highs near $1.30 revived some of fixed income's traditional safe haven appeal, but only after 10-year euro debt yields hit 1-1/2 year highs at 4.10 percent and Bund futures struck contract lows. A fall of more than 1 percent in European shares on Friday also benefited fixed income, as investors took fright at the roaring euro.
But, after a string of key technical support levels snapped in recent weeks under the weight of heavy selling, dealers say the bond market's rout may be too far advanced to be helped much by the notion that a firm currency is weakening the economy.
On Thursday, official statistics confirmed expectations of a euro zone economic rebound in the first quarter, with growth in gross domestic product doubling to 0.6 percent from the last three months of 2005.
"It's the technical picture that's driving things more than anything else. It's trading like a classic bear market. But we are on some very big long term levels," said a euro debt trader.
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