NEW YORK: The euro rallied to a fresh seven-week high against the US dollar on Thursday after Federal Reserve minutes hinted at more monetary easing in the United States while French and German business activity surveys were not as bad as feared.
The Fed minutes, released on Wednesday, showed the US central bank may opt for more stimulus, which investors view as a third round of quantitative easing, "fairly soon".
But the dollar pared some of its losses againt the euro after St. Louis Federal Reserve President James Bullard told CNBC television that data since the last policymakers' meeting had been somewhat better and that the minutes were "a bit stale".. The dollar rose to a session high against the yen as Bullard spoke.
Bullard's "comments were in line with the view that QE3 is not a foregone conclusion," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington, D.C. "I'm not pricing in QE3 as a done deal in September and in that case, the dollar sell off is over done."
The euro was last up 0.2 percent on the day at $1.2554. It was off an earlier high of $1.2572, its strongest since July 4.
Analysts saw scope for further gains for the euro in the near term due to expectations the European Central Bank will act to lower Spanish and Italian bond yields next month.
"There is a lot of momentum, people are still short of the euro and you have both sides of the equation, the Europe side and the US side, coming together," said Audrey Childe-Freeman, head of foreign exchange strategy at BMO Capital Markets in London.
"Another round of Fed QE (quantitative easing) was something many people were talking about but not many were believing. If you look at previous times the Fed has done QE it is undeniably bearish for the dollar."
Childe-Freeman said if Federal Reserve chairman Ben Bernanke confirms more QE is possible when he speaks at Jackson Hole later this month and if there are no "nasty negative shocks" from Europe, the euro could rise to $1.2760 (the 50 percent retracement of the March to July sell-off) next month.
But while some market players expect the Fed's likely easing to come in the form of a third round of bond buying, known as "QE3", others caution it may extend the period it plans to keep exceptionally low rates in place instead.
The Fed has pledged to keep low rates through late 2014.
Chicago Fed President, Charles Evans, told a news briefing in China on Thursday that the Federal Reserve should do more to boost the United States economy as the most recent uptick in employment data is still not good enough..
The number of Americans filing new claims for jobless benefits unexpectedly rose last week, suggesting the labor market is healing too slowly to make much of a dent in the unemployment rate, a report showed as the New York session opened..
FRAGILE EURO ZONE
The euro was bolstered by mostly better-than-expected French and German purchasing managers' surveys, although market participants were wary that the outlook for the euro zone economy remains fragile.
"Economic releases from Europe were EUR positive as manufacturing PMIs were generally above expectations and July's print," said Camilla Sutton, chief currency strategist at Scotiabank in Toronto.
Data on Thursday showed a long-running contraction in French business activity eased in August, while the index tracking Germany's manufacturing sector rose in August, though it remained in negative territory, contracting for the sixth straight month.
Figures for the euro zone as a whole still pointed to recession, however.
This week, a series of high profile meetings may help frame the next phase of ECB policymakers' response to the debt crisis.
German Chancellor Angela Merkel and French President Francois Hollande meet later on Thursday to calibrate their message to Greek Prime Minister Antonis Samaras.
Merkel said on Wednesday no decisions would be taken during her talks with Samaras on Friday and that she would wait for the lenders' report on Greek progress in meeting targets, which is not expected until at least late September.
The St. Louis Fed's Bullard on Thursday voiced unusually blunt skepticism over the outlook for the euro zone and warned that the best hope might be for the region to just "muddle through" its sovereign debt crisis..
The US dollar rose 0.1 percent against the yen to 78.62 yen with the session peak of 78.69 yen. The dollar suffered its biggest one-day loss in nearly two months against the yen on Wednesday after the Fed minutes.
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