Euro springs back

The euro rose against the dollar on Thursday after three straight days of losses as upbeat US economic data and signs of improvement in the eurozone stoked risk appetite, though the rally was likely to be short-lived. The euro jumped to a global session high of $1.30500 on trading platform EBS after the US government reported that new applications for unemployment insurance fell to a 3-1/2-year low, suggesting the job market's recovery was gaining speed.
Two regional Federal Reserve surveys showed stronger-than-expected growth in factory activity. The US data offered further proof of increased momentum in the economy. "Generally risk sentiment improved a little bit. We had better data out of the eurozone. US data was also a little better," said David Watt, senior currency strategist, at RBC Capital Markets in Toronto.
In late afternoon trading, the euro was up 0.3 percent against the dollar at $1.30186, taking a breather from a massive selloff. The euro on Wednesday dropped to $1.29450, the lowest level since January 11. The next major support is at the year's low, $1.2860, hit on January 10. BNP Paribas has forecast that the eurozone economy will slide into recession in 2012 and that additional monetary easing by the European Central Bank will be required to prevent the economy from deteriorating even further.
The French bank expects euro/dollar to hit $1.28 by the end of the first quarter. The common currency on Thursday, however, drew some comfort from a successful Spanish bond auction. "If (Spanish) yields continue to drift down in coming days, there may be some further euro gains, but if, as in the past, there is a post-auction hangover and yields bounce back up, the euro is likely to come under pressure again," said Steven Englander, head of G10 strategy at CitiFX, a division of Citigroup.
In the options market, the one-month euro/dollar implied vols fell to a 2-1/2-month low of 13.10 percent on Thursday, suggesting reduced anxiety about the eurozone debt crisis. The pair's implied vols now trade below their 50- and 100-day moving averages. It was last at 13.30 percent.
In the currency forwards market, funding pressures have eased somewhat, but remained elevated. The benchmark three-month cross-currency basis swap, a gauge of dollar demand corresponding to the relative premium for swapping euro LIBOR for dollar LIBOR, traded at -132.0 basis points on Thursday, from -152.00 basis points on Wednesday. In general, wider spreads reflect elevated demand to borrow US dollars in the currency forward market. The euro last traded down 1.1 percent at 1.22410 francs while the dollar traded 1.3 percent lower against the franc at 0.9402.
The US dollar index, which measures the dollar's performance against a basket of major currencies, was last down 0.4 percent at 80.295 as investors booked profits on long dollar positions. Against the yen, the dollar, meanwhile, eased 0.2 percent to 77.870 yen.