Euro rallies in New York

The euro gained 1 percent against the dollar on Thursday as strong eurozone economic data and US 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 pared gains against the dollar but dropped sharply against other currencies as US stocks rallied, improving market sentiment a day after Federal Reserve Chairman Ben Bernanke painted a gloomy outlook for the US economy. Analysts said weak US data lately has forced investors to reconsider their assessment of US 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 US has been quite soft," said Dean Popplewell, chief strategist at FX brokerage OANDA in Toronto.
"The euro's had a hell of a bounce-back, 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 rose 1 percent to $1.2887, and added 0.8 percent to 112.05 yen. The dollar was off 0.2 percent at 86.91 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 US 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 US Treasuries fell to a record low 0.57 percent earlier this week, below the yield on comparable German debt. Investors were cheered, however, by data on Thursday showing US existing home sales fell 5.1 percent in June, less than the 8.1 percent decline expected in a Reuters poll.
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.