Chinese, German data boost euro in London

The euro rose on Tuesday as better than expected economic data boosted riskier assets and triggered short-covering, but it was likely to remain pressured in 2012 on worries over high sovereign debt and low growth in the eurozone. Sentiment was boosted by better Chinese manufacturing and service data, while German unemployment fell more than forecast after Monday's manufacturing PMI showed less contraction than expected.
A rally in European shares on the back of the figures suggested warming appetite for riskier assets at the start of the year. This pushed the euro 1 percent higher on the day to $1.3059, pulling away from its 2011 trough of $1.2858 hit last week on trading platform EBS. The single currency started 2012 on an upbeat note, having lost 3 percent last year. Traders reported demand for euros from US and UK banks, which also contributed to its recovery from an 11-year low against the yen touched the previous day.
But persistent worries about high sovereign debt levels and a lack of policy solutions to a crisis now in its third year - which threatens to push the region's economy into recession - were expected to keep the euro under pressure. "There needs to be a sustained improvement in euro zone fundamentals for a prolonged rebound in the euro," said Valentin Marinov, currency strategist at Citi.
"Concerns over Spain and Italy are still there and the risks from Greece are likely to continue to cloud the euro outlook, outweighing the positives coming from resilient German data." Traders said stops in the euro were triggered through $1.3020 en route to the day's high, before it trimmed gains to trade around $1.3030, its upside capped by offers reported from around $1.3050 through $1.3080.
"Generally we stick to the view that rallies in the euro should be sold into," said Manuel Oliveri, currency strategist at UBS in Zurich. Against the yen, the euro rose 0.6 percent to 100.13 yen . It fell to 98.71 yen in holiday-thinned trade on Monday, its lowest since December 2000.
Investors are particularly concerned over Italy as it faces around 100 billion euros of bond redemption and coupon payments in the first four months of 2012, with 10-year borrowing costs near the crucial 7 percent level. Worries over Greece were reinforced after a government spokesman said it would have to leave the eurozone if it failed to clinch a deal on a second 130 billion euro bailout with its international lenders.
One factor that could slow the euro's descent is market positioning. The latest US Commodity Futures Trading Commission data shows net short positions held by currency speculators swelled to a record high. The euro may also get a reprieve if European policymakers make progress on steps to tackle the debt crisis in a series of meetings in January.
French President Nicolas Sarkozy will meet German Chancellor Angela Merkel in Berlin on January 9 for talks that are likely to centre on new rules to enforce budget discipline across the European Union. Finance ministers from the EU's 27 members will meet on January 23 before their leaders hold a summit a week later.
Earlier on Tuesday, the euro reached a record low versus the Australian dollar, below A$1.2600. The Aussie rose 1.2 percent versus the greenback to $1.0369, helped by a rise in equities. US economic data will be a focal point for this week, starting with the ISM manufacturing survey on Tuesday. The dollar dipped 0.3 percent to 76.70 yen, not that far from a record low near 75.31 yen hit in late October, while it fell 0.5 percent against a currency basket to 79.749, below a near one-year high of 80.854 hit last week.