Euro up on German data as market looks ahead to Fed

NEW YORK: The euro rallied on Tuesday as better-than-expected German and Chinese factory data calmed some concerns about slowing global growth.

Commodity-linked, growth-sensitive currencies such as the Australian and New Zealand dollars gained ground, too, while the US dollar was hobbled by expectations that the Federal Reserve may soon act to stimulate a flagging US economy.

Fed Chairman Ben Bernanke will speak at the central bank's annual retreat in Wyoming on Friday. At last year's speech, he prepared markets for a $600 billion bond-buying program.

Such measures increase the amount of dollars in the system, driving down the currency's value, which helps US exports, and prompting investors to seek higher returns elsewhere.

"The market is really geared up for the idea of additional asset purchases to at least be put on the table when Bernanke speaks," said Brian Dolan, chief strategist at Forex.com in Bedminster, New Jersey. "I'm not sure it will play out that way but that's what the market is betting on now."

Europe's debt and banking crisis has had some investors wondering whether the European Central Bank wouldn't soon have to adopt some monetary easing of its own, but a solid German manufacturing index eased some of those fears.

European shares rose and the euro at one point approached $1.45. It was last up 0.7 percent at $1.4460.

The German data, taken with a report showing China's factory sector held up better than expected in August, helped investors overlook a separate report showing a sharp fall in German economic sentiment.

The Australian dollar rose 1 percent to $1.0501. Strong Australian-Chinese trade links make the Aussie sensitive to Chinese economic data. The New Zealand dollar jumped 1.2 percent to $0.8330.

"Asia has been the driver of global growth, so if Asia stays strong that will really help global markets," said Steven Saywell, head of FX strategy at BNP Paribas.

INTERVENTION STILL ON RADAR

The euro rose 0.5 percent to 1.1402 Swiss francs as investors were wary that the Swiss National Bank could reenter markets to curb recent franc strength.

The SNB has cut interest rates to zero, flooded the banking system with francs and intervened in the forward market to make returns on francs less attractive to potential investors.

Some of that appeared to be working. In the options market, implied volatility in euro/Swiss dipped to about 18 percent from 20 percent on Monday as tighter ranges in spot suggested the recent SNB measures are taking effect.

The dollar dipped 0.4 percent to 76.52 yen although market players remained wary of yen-selling intervention by Japanese authorities. The dollar hit a record low around 75.94 last week.

Bank of Japan data suggested Japan sold roughly 4.5 trillion yen in currency intervention on Aug. 4, its biggest one-day yen-selling intervention ever.

But the yen ended up rising back to levels seen before intervention a few days later, thanks largely to hedge fund buying, analysts said.

"With a slight lag, rises in dollar/yen have been met with yen buying by hedge funds," Citigroup analyst Todd Elmer said in New York. "This build-up in long yen positioning and a tendency among investors to buy on dips suggests that intervention has thus far been an ineffective deterrent."

Copyright Reuters, 2011