The euro rose against the dollar on Friday after strong growth data in Germany and France bolstered expectations a healthy eurozone economy will keep interest rates in the region higher than their US equivalents. But some analysts said the euro's rebound from recent losses could prove short-lived as concerns about debt problems in peripheral eurozone states may outweigh rate differentials.
A close in the single currency below its 55-day moving average around $1.4272 could point to further losses, technical analysts said. The euro rose as high as $1.4340 after strong first-quarter GDP data from the eurozone's biggest economies prompted demand from Asian sovereign names, European real money accounts and leveraged funds.
Market participants said higher commodity and share prices also helped stoke demand for riskier assets after they took a hit this week, and that the single currency may gain more during the day as investors continue to cover short euro positions. "Today's move is really a relief rally on the back of the stronger GDP figures," said Lee Hardman, currency economist at BTM-UFJ. "But there is still divergence in the growth performance in the (eurozone) member states.
"We still believe a weak euro will be required for a solution to the eurozone's problems, and we don't think this near-term bounce will be sustained," he said. The euro was 0.3 percent higher on the day at $1.4280 but off the day's highs, with traders citing an Asian sovereign name selling around the session peak.
The German economy grew 1.5 percent in January-March from the previous quarter, while French GDP rose 1.0 percent. Both readings exceeded forecasts, as did an 0.8 percent rise in the overall eurozone economy. However, figures also showed Portugal entered a technical recession, highlighting the growth gulf between countries in the region. The data helped the euro recover from recent sharp falls triggered by talk Greece may need to restructure its debts.
The dollar also gave back some of the gains made in the past week as a rout in commodity prices hurt risk appetite, prompting unwinding of dollar-funded bets on risky assets. The dollar slipped 0.2 percent versus a currency basket to 75.076. "We've had the stronger European GDP numbers ... and it's starting to feel like we're getting to the end of the risk aversion trade," said Geoff Kendrick, currency strategist at Nomura.
Friday's eurozone GDP data added weight to the view that a buoyant economy will add to inflation risks, making the European Central Bank more likely to raise rates in the coming months, while the US Federal Reserve is expected to keep policy loose. A meeting of Eurogroup finance ministers on Monday, followed by an Ecofin meeting of EU finance ministers, could provide further direction to the single currency.
There are doubts whether a substantial agreement to help Greece manage its debts is likely to emerge from the meetings, keeping uncertainty high over how long the country can avoid a restructuring and making some investors reluctant to load up too much on risky assets, analysts said. The euro was steady against the yen at 115.29 yen and up 0.55 percent versus the Swiss franc at 1.2657 francs.