LONDON: The euro has defied predictions of its demise by rising almost eight percent against the dollar since mid-January, in large part owing to Chinese confidence in the debt-ridden eurozone, analysts said.
However the single currency's fragile state was exposed on Thursday as it tumbled on receding expectations of a rate hike any time soon for the eurozone.
"The price action in euro/dollar has largely been one way since January 10th of this year," said Neil Mellor, an economist at financial group BNY Mellon.
"It was around this time that China began to express its very clear support for eurozone debt. A lot of the market's concerns about funding have been eased thanks to China," he told AFP.
The European Financial Stability Facility -- established in June to help heavily-indebted eurozone members -- last month sold five-year bonds worth five billion euros ($6.8 billion) to help raise funds for Ireland.
China is widely reported to have taken part after the world's second biggest economy signalled its intention to do so last month.
Asian bidders snapped up more than one third of the total, in what EFSF head Klaus Regling said demonstrated market confidence in the 17-nation eurozone after the turmoil of massive bailouts for Greece and Ireland last year.
The government of Japan alone bought more than 20 percent.
Since striking its lowest level since September 2009 in early January, the euro has gained 10 cents against the dollar. The single European currency reached a three-month high of $1.3862 on Wednesday on increased expectations of a rate hike.
However such forecasts were shattered on Thursday after the European Central Bank kept interest rates on hold and ECB president Jean-Claude Trichet eased fears over high inflation.
In the space of 24 hours, the euro was back to just above $1.36 and fell even further after US jobs data was announced.
"Although the recent rally in the euro was mostly fuelled by expectations of rate hikes by the ECB, sentiment was also boosted by the markets giving EU officials the benefit of the doubt that they could come up with a credible long-term solution to the sovereign debt crisis," said Kathleen Brooks, an analyst at traders Forex.com.
"If EU leaders fail to deliver the goods there could be another leg lower for the single currency," she warned.
A higher interest rate would meanwhile boost the euro against other major currencies because euro-denominated investments would generate higher returns.
But on Thursday, remarks by Trichet suggested that the ECB was less concerned about inflation than earlier thought -- and that any rate hike would come later in the year.
"Inflation expectations over the medium to longer term continue to be firmly anchored in line with the governing council's aim of keeping inflation rates below, but close to, two percent," Trichet said.
He spoke after the central bank held its main interest rate at a record low of 1.0 percent. Eurozone inflation jumped to 2.4 percent in January, its second month above the ECB target of below but close to 2.0 percent.
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