The euro rose against the dollar on Friday for a fourth straight session as improved business sentiment in Germany added to hopes that the euro-zone economy may already have seen the worst of the recession. Dollar demand also faded as a stock rally lifted investor risk appetite, though analysts said worries that US automaker Chrysler may be nearing bankruptcy also hit the greenback.
The dollar tends to rise with investor anxiety because it is considered the safest store of value when economies world-wide are contracting. It usually falls when risk appetite grows. "Equities are bid, keeping the dollar under pressure, and recent data, particularly from Europe, supports the notion that the pace of economic decline is at least not accelerating," said Dustin Reid, currency strategist at RBS Global Banking & Markets in Chicago.
The euro rose 0.7 percent to $1.3245 after earlier rising above $1.33 for the first time in nearly two weeks. It hit a two-week peak against sterling near 91 pence after data showed the UK economy registered its sharpest contraction in 30 years during the first three months of 2009.
Sterling fell 0.4 percent to $1.4661. The dollar fell 1 percent to 97.08 yen and declined 0.9 percent to 1.1395 Swiss francs, with some of the losses tied to worries that Chrysler is moving closer to bankruptcy, said Wells Fargo FX strategist Nick Bennenbroek.
The euro pared some gains after the Federal Reserve said the top 19 US banks need to hold a "substantial" amount of capital above regulatory requirements. Some analysts warned that market sentiment may deteriorate in the days ahead on any sign of new banking sector trouble.
Greg Salvaggio, senior vice president for capital markets at Tempus Consulting in Washington, said there is still "significant concern out there that more than one of the larger US financial institutions will be deemed failures." The results of the government's bank stress tests are due to be released on May 4.
Still, finance chiefs from the Group of Seven most industrialised countries on Friday said the pace of economic decline had slowed and pledged to clean up banks' bad assets and restore credit flows. The euro got a boost after Germany's Ifo business sentiment survey rose in April, adding to a string of improved euro-zone data this week.
George Davis, director for foreign exchange at RBC Capital Markets in Toronto, said the euro "has been oversold for some time, and with better-than-expected data in the region giving support, there might be further gains in store." Earlier this week, the euro hit a one-month trough against the dollar below $1.29 as investors speculated the European Central Bank may not cut interest rates enough next month to stimulate the economy.