LONDON: The euro hit a five-week high against a broadly weak dollar and commodity currencies rallied on Thursday after a more dovish-than-expected US Federal Reserve indicated interest rates would stay at ultra low levels for at least another two years.
Analysts expected the dollar to stay subdued, but said an Italian bond auction later in the session and the protracted Greek debt swap talks would help drive market sentiment. Any negative headlines could prompt investors to buy back the safe haven greenback.
The euro was last flat on the day at $1.3112 having climbed to $1.3134 in Asian trade from around $1.2980 before the Fed statement with macro funds cited as heavy dollar sellers. Topside resistance was seen around $1.3199, the Dec. 21 high.
Higher-yielding commodity currencies also outperformed as the prospect of continued easy monetary policy boosted investor appetite to take on risk. The Australian dollar hit a three-month high of US$1.0650, while the New Zealand dollar traded at US$0.8213, its highest level since Oct. 31.
Fed Chairman Ben Bernanke said the US central bank might consider further monetary easing through bond purchases. The Fed also pushed back the likely timing of an eventual interest rate hike until late 2014, 18 months later than previously suggested.
"The main surprise was they were unequivocally dovish in their statement which suggested they do not need data to deteriorate to justify easing monetary policy further," said Michael Sneyd, FX strategist at BNP Paribas.
"We think this risk rally will last a bit longer, particularly in the commodity currencies. Against the euro there is still the overhang that we do not have any resolution to a Greek PSI agreement, euro/dollar is probably going to top out."
The dollar also gave back some of its recent gains against the yen, slipping to 77.59 following its rise to a two-month high of 78.28 yen on trading platform EBS on Wednesday.
Strong technical resistance was cited around 78.30 yen, with the 200-day moving average now at 78.33 yen. The 61.8 percent retracement of the pair's October-January fall also lies at 78.31 yen.
"After the Fed, the dollar will have a harder time continuing this week's gains against the yen. The topside has gotten heavy," said Teppei Ino, currency analyst at Bank of Tokyo-Mitsubishi UFJ.
The euro dipped 0.1 percent to 101.77 yen but held within sight of a fresh one-month high of 101.97 yen hit in early Asian trade, well above an 11-year low of 97.04 yen marked on Jan. 16.
GREEK FOCUS
Italy will test market sentiment with a sale up to 5 billion euros of zero coupon (CTZ) and inflation linked bonds ahead of a longer-term debt auction on Monday. Recent demand for short-dated euro zone sovereign debt has been solid, and analysts expected the auction to go smoothly.
Market players were also focused on the progress of negotiations over private sector involvement (PSI) in a Greek debt swap, seen as crucial if Greece is to avoid a disorderly debt default.
With time slipping ahead of a March deadline when Greece faces major bond redemptions, the top negotiator for private creditors, Charles Dallara, returns to Athens on Thursday to resume talks with officials, both sides said.
While the single currency's climb has led many investors to cut back what had been significant short positions, some of these positions remain, leaving it open to short covering rallies despite concerns about Europe's debt situation.
Still, many analysts said the overall outlook for the euro was shaky. Morgan Stanley strategists said in a note that any corrective rebound into the $1.3230 area in coming days should be used as an opportunity to re-establish bearish strategies.
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