LONDON: The euro climbed towards $1.10 against the dollar on Wednesday, encouraged by a robust German business morale survey that added to expectations that an economic recovery in the euro zone is strengthening.
But with the ECB's 1.1 trillion euro asset purchase programme in place, short-dated euro zone bond yields are likely to be capped and keep gains in the euro limited, traders said.
The German IFO indicator, based on a monthly survey of some 7,000 firms, climbed to 107.9 in March from 106.8 in February, higher than the Reuters consensus forecast for 107.3 and the strongest reading since July 2014.
That followed an encouraging ZEW survey last week a strong German PMI data released on Tuesday. Regional business surveys were also robust, with the eurozone composite flash Purchasing Managers' Index (PMI) jumping to a near four-year high.
The euro was up 0.3 percent at $1.0955, having witnessed huge swings in the past week and still well clear of a 12-year trough of $1.0457 set on March 16. Euro gains against the dollar have come mainly since the Federal Reserve signalled a more cautious outlook for U.S. growth.
"While the German data is encouraging, I don't think it changes much for the euro," said Peter Kinsella, currency strategist at Commerzbank. "We are only in the third week of ECB money-printing and while the euro may move higher a bit on the data, I doubt those gains will be sustained."
Investors have cut long dollar positions after the Federal Reserve took a dovish tone on interest rates last week, sending the currency off multi-year highs.
The dollar index stood at 96.981. On Tuesday it set a two-week low of 96.387, down roughly 4 percent from a near 12-year high of 100.39 struck in mid-March.
U.S. data on Tuesday was modestly dollar-friendly, with an uptick in underlying inflation likely to support the view that the Fed will raise rates this year.
Position-squaring and profit-taking ahead of the end of the quarter could give the euro a further lift versus the dollar in the near term, said Lee Jin Yang, macro research analyst for Aberdeen Asset Management in Singapore.
"One of the key consensus trades that will come under pressure will be definitely the euro. $1.10 to $1.12 is a key area... If it breaks higher, we may see more position unwinding," Lee said.
Data from the U.S. Commodity Futures Trading Commission showed speculators had increased their bearish bets against the euro after the European Central Bank began its quantitative easing programme this month.
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