The euro rose against the dollar on Friday after a German business sentiment survey beat forecasts, suggesting Europe's largest economy is picking up and making further euro zone monetary easing less likely. After strong gains on Thursday, the yen remained firmer as weak equity markets helped the safe-haven currency recover after its recent hefty falls.
The euro was up 0.2 percent at $1.2964, after the monthly German Ifo survey showed business morale improved far more than expected in May. It traded close to this week's peak of $1.2998 and the mid-May high of $1.3030. "After the Ifo data there is a bit of optimism that we might see some positive surprises in euro zone data going forward and that is giving the euro some support," said Arne Lohmann Rasmussen, head of FX research at Danske Bank. He expected the euro to hold up well and forecast it at $1.30 in three months.
The Ifo data came as a relief to market participants after recent comments from European Central Bank officials fuelled expectations the central bank could lower interest rates further, even potentially cutting the deposit rate to negative. ECB easing prospects have contrasted with speculation the Federal Reserve may scale back its asset purchasing programme if the US economy improves further. Chairman Ben Bernanke said on Wednesday stimulus could be trimmed in one of the bank's next few policy meetings.
The dollar fell 0.7 percent against the yen to 101.39 yen, near a two-week low of 100.83 yen hit on Thursday when Japanese shares fell 7.3 percent. It fell 0.75 percent against the Swiss franc, another safe haven which has recently tracked the yen lower. Against a basket of currencies the dollar fell to its lowest in more than one week at 83.433.
Although most analysts and traders expect the trend of yen weakness, exacerbated by aggressive Bank of Japan monetary easing in early April, to resume, they say the yen could firm in the coming weeks. The dollar has gained around 17 percent against the yen this year and the euro is up around 15 percent, allowing room for a correction. However, traders expect the dollar to find support at the 100 yen level, citing strong importer bids.
"The yen weakening trend will remain. But there will be a correction in the short term and it could be a sizeable one," said Ian Stannard, Morgan Stanley head of European FX strategy. The euro was last down 0.5 percent at 131.36 yen, having hit a two-week low of 129.945 yen on Thursday.