Euro advances in first quarter

The euro firmed against the US dollar in the first quarter, buoyed by expectations of eurozone rate hikes, but gains could stall in the next few weeks due to nagging peripheral debt concerns. Technical indicators suggested the euro was in the midst of a correction to the downside after gaining 6 percent in 27 days from its low of $1.3428 on February 14 to last week's high at $1.4249.
The $1.4249 level is the euro's resistance, and if that goes, euro bulls could target $1.4283, the November 4 peak. On the way down, analysts said a strong break below the key $1.4000 psychological level would signal a shift in the euro's uptrend, with downside support at $1.3850.
More importantly, the fundamental outlook for the euro zone remains cloudy, particularly at the periphery, even though an interest rate increase seems imminent at a European Central Bank monetary policy meeting next week. "In our view, the euro will weaken on a longer-term horizon ... There's an awful lot of (rate hikes) priced in at the moment and that's because of the change in language from ECB President (Jean-Claude) Trichet," said Frances Hudson, investment director for strategy at Standard Life Investments in Edinburgh.
Standard Life has about $214 billion in assets under management and the firm maintains a long dollar/short euro position in its Global Absolute Return Strategy portfolio. The latest challenge to the eurozone was a bank stress test in Ireland released on Thursday, which indicated that the country's banks need another 24 billion euros in capital to plug potential losses.
In late afternoon trading, the euro rose 0.4 percent to $1.4178. It has gained 6 percent against the dollar and 8 percent against the yen in the first quarter, largely due to the outlook that the ECB would raise rates well before the Federal Reserve and the Bank of Japan. Against the yen, the euro was up 0.7 percent at 117.90 after hitting a 10-month high at 117.90 yen.
In the options market, benchmark volatilities implied by one-month at-the-money euro/dollar options fell to 9.3 percent on Thursday, a one-year low, suggesting eurozone debt worries were not at the forefront for investors. Six-month and one-year implied vols emained elevated though, trading at 11.5 percent and 12.35 percent respectively. The ICE Futures' dollar index fell 0.4 percent to 75.872, dropping 4 percent in the first quarter as the euro, the currency with the largest share in the index, surged. Some analysts have started to raise their forecasts on the dollar given increasing hawkishness from Fed speakers. The dollar trimmed losses against the euro and rose versus the yen on his comment. The greenback was last at 83.13 yen, up 0.3 percent.