The euro hit a two-month high against the dollar and the safe-haven yen on Friday as investors cheered the European Central Bank's plan to lower borrowing costs for Spain and Italy. ECB President Mario Draghi, backing up his promise to do whatever it takes to preserve the euro, unveiled a new and potentially unlimited bond-buying programme on Thursday aimed at lowering painfully high borrowing costs for stressed member states.
Yields on Spanish 10-year government bonds fell below 6 percent for the first time since May, while Italian yields also dropped, lifting the euro across the board. The single currency rose to its highest against the Swiss franc in eight months, data from trading platform EBS showed. Market speculation that the Swiss National Bank could raise its floor against the euro to 1.22 Swiss francs from 1.20 also prompted hedge funds to unwind bets the euro would fall.
Some said the euro may rise further against the dollar in the near term due to the potential for more position squaring and the risk of further monetary easing by the US Federal Reserve if US jobs data later in the day disappointed. "We expect the euro to rise above $1.27 in the near term," said George Saravelos, G10 FX strategist at Deutsche Bank. "Draghi has lowered the risk premium towards the euro and some of the action in the euro/Swiss is reflective of that."
The euro rose 0.6 percent at $1.2701 on EBS, its highest since late June, knocking out a reported option barrier at $1.2660. More barriers were cited at $1.2700 with offers to sell by sovereign funds layered around those levels, traders said. The single currency also rose to a two-month high of 100.30 yen, up 0.4 percent on the day, and 1.21555 Swiss francs.
Draghi's plan gave a huge boost to riskier assets such as stocks and put safe-haven currencies like the yen and Swiss franc under pressure. The dollar inched up 0.1 percent to 78.96 yen, not far from a three-week high of 79.04. The yen has ceded ground against the dollar this week after stronger-than-expected data on US private-sector employment triggered a rise in Treasury yields.
The Australian dollar rose 0.6 percent to $1.0345, holding firm after climbing roughly 0.9 percent on Thursday for its biggest one-day gain in a month as traders trimmed bets against the commodity currency. A flood of Chinese data on Sunday could provide a challenging backdrop for the Australian dollar, which has retreated over the past month on worries about a slowdown in China, Australia's single biggest export market.