The euro hit a two-month high above $1.36 on Friday and its break of important technical levels suggested more gains to come now that anxiety about a euro zone debt crisis has started to wane. The euro has outperformed the dollar in eight of the last 10 sessions, and Friday's breach of $1.3570 took it above the 50 percent retracement of its November-to-January slide. It was last up 1 percent at $1.3615.
-- Euro breaks technical barrier, at 2-month high vs dollar
-- Confidence in Europe's handling of debt crisis helps
-- Fed likely to stand pat; euro could extend gains
Inflation, rate outlook help lift sterling
Traders said a solid break of $1.36 would target the 100-week moving average at $1.3640 and then $1.3736, the 61.8 percent retracement of a decline that started when the euro was above $1.42 in November. "Markets are clearly buying into the view that the European debt crisis is being resolved with modest pain," said Steven Englander, head of G10 FX strategy at Citigroup in New York.
The euro also hit a five-week high around 112.49 yen after a break above a closely watched Japanese technical indicator around 112 yen, with a close above there seen as bullish. The dollar slipped 0.5 percent to 82.55 yen. Recent strong debt auctions in Spain and Portugal and talk that officials were considering letting a European rescue fund purchase government debt from troubled euro zone countries heartened investors, narrowing euro zone credit spreads and boosting European bank shares along with the euro.
Few investors expect the Federal Reserve, which meets next week, to alter its commitment to loose monetary policy or its plan to buy $600 billion in Treasury debt by mid-2011. The European Central Bank, by contrast, recently warned of rising euro zone price pressures, sparking speculation that it could lift lending rates before the Fed does. Traders said that could add to euro momentum next week.
UK inflation is above the Bank of England's target, though policymaker Adam Posen said that a rate hike wasn't necessarily imminent. Sterling rose 0.6 percent to $1.6008. To be sure, after rising more than 4 percent against the dollar since January 10, the euro may be due for a correction.
Data showed speculators in the latest week were positioned in favour of the euro for the first time in two months, which could set up some profit-taking next week. Then there are the lingering debt uncertainties. "The situation in Europe is still largely unresolved," said Jason Polit, an analyst at Charles Schwab Private Client in Phoenix. "Some sort of bailout for one or more of the peripheral economies will likely occur eventually and that will put downward pressure the euro."
Investors have worried about debt levels in Spain and Portugal, with the latter often tagged as likely to require a bailout similar to those extended to Greece and Ireland. However, Spanish government bond yields fell Friday, with the spread over German Bunds narrowing to its tightest since mid-November, and Portuguese bond spreads also narrowed.
Polit, who manages around $235 million in assets for clients, said he was still playing it safe, reducing allocations in emerging markets and focusing more on developed markets with manageable debt levels, such as Germany. "It is best to stay guarded with so many questions still unanswered about the euro zone," he said.