The euro strengthened on Thursday, posting its largest one-day gain against the US dollar in two weeks, as investors became more optimistic about a rescue plan for debt-stricken Ireland. Gains in the euro, however, may prove short-lived given concerns Ireland's troubles may spread to other peripheral economies in the eurozone such as Portugal and Spain.
Problems in Ireland overshadowed generally upbeat US economic reports that propelled the US dollar to a six-week high against the yen. Data on Thursday showed some improvement jobless claims while factory activity in the US Mid-Atlantic region grew more than expected in November. "At this point, Europe is going to address the Irish problem," said James Dailey, chief investment officer and senior portfolio manager at TEAM Asset Strategy Fund, a mutual fund based in Harrisburg, Pennsylvania.
"I think what you saw over the last two weeks with Angela Merkel (German Chancellor) ... talking about debt holders having to share in the losses and backtracking from that is indicative ... (Europe) is likely to monazite this problem," said Dailey, who oversees assets of about $45 million.
The euro earlier climbed about 1.0 percent versus the dollar and yen as the cost of insuring Irish debt against default fell after Ireland's central bank chief said he expected Dublin to receive tens of billions of euros in loans from European partners and the IMF.
"The issues in Europe are going to take time to iron out," said Greg Faranello, managing director and head of Treasury and trading at Espirito Santo Investment S.A. in New York. "But the euro will be subject to periods like today where markets are stretched and sentiment on the euro has gotten very negative. Short-term, we were due for a little bit of a correction anyway."
Market participants cautioned, however, that lingering worries about other debt-laden European countries will likely continue to weigh on the euro, which has lost about 3.0 percent this month as funds liquidated long positions. TEAM's Dailey said he expects further downside in the euro, falling to anywhere between $1.30-$1.32. "We'll probably see a spike because the decline has been pretty much linear. When that happens, we can go back up to $1.36-$1.37 and that would probably be an opportune time to sell the euro again."
Year-end flows could further support the dollar versus the euro along with an improving US economic picture. The euro hit a session high of $1.3668 on trading platform EBS, moving away from a seven-week low of $1.3446 set on Tuesday. It was last up 0.8 percent at $1.3629, the euro's best daily performance since early November.
Traders said stop-losses were triggered at $1.3630. Resistance is at $1.3750, followed by $1.3765, the 38.2 percent retracement of this month's fall. It also rose 1.1 percent against the yen to 113.80. Still analysts said even if a quick resolution is reached over Ireland, investors are likely to fret about other peripheral economies and their debt levels, with Portugal viewed as the next crisis spot.
Against the yen, the dollar rose 0.3 percent to 83.50 yen, extending gains after the release of Thursday's positive US data. It earlier hit a high of 83.79, the dollar's strongest level since October 5, according to EBS. Optimism about Ireland also bolstered risk appetite toward equities and commodities and drove higher-yielding currencies up. The Australian and New Zealand dollars rose about 1.0 percent on Thursday.