NEW YORK: The euro traded roughly unchanged against the dollar on Thursday, after earlier hitting a five-week high, as the recent rally in the single currency petered out even after the US Federal Reserve's pledge to keep rates near zero for several more years.
The euro has been prone to bouts of strength since last week as investors scrambled to cover large bets against the single currency.
"The last phase of the short-covering likely emerged at the $1.3150 level, and we will probably see a stabilization trade over the next week," said Greg Anderson, G10 strategist at CitiFX, a division of Citigroup in New York.
"The shorts are gone, and while the Fed alleviated some of the tail risk, nothing obvious is tipping the market in one direction right now."
The euro hit a session high of $1.3184 before paring gains to trade at $1.3100, unchanged on the day.
Signs that the US economic recovery is gaining traction had supported the euro earlier in the day. While first-time claims for US jobless benefits rose in the latest week, the underlying trend pointed to improvement in the labor market. The government separately reported that orders for US manufactured goods rose more than expected in December.
But the euro slid against the dollar in afternoon trade as the Fed's rate pledge failed to spark a breach in a key technical level in the pair.
The failure of EUR/USD to breach the 61.8 percent retracement of the $1.3550 high in December to the $1.2624 low on Jan. 13 was behind the euro's drop, according Brian Dolan, chief currency analyst at Forex.com in Bedminster, New Jersey.
"Also, the dollar's weakness brought on by the Fed's announcement may have been overdone because the central bank yesterday did not come close to committing to QE3," he said. "The dollar's recent weakness was suspicious overall."
The Fed on Wednesday pushed back the likely timing of an eventual interest rate hike until late 2014, 18 months later than previously suggested. Federal Reserve Chairman Ben Bernanke also said the US central bank was ready to offer additional economic stimulus.
The dollar's response to a third round of quantitative easing may be even more measured than was the case following QE1 and QE2. According to CitiFX's PAIN index, a gauge of hedge fund positions, current dollar positioning looks to more closely mirror that seen at the time of QE1 in March 2009 than that surrounding the introduction of QE2.
QE1 saw a greater magnitude of initial dollar decline and the trend toward dollar depreciation was quicker to reassert itself in subsequent months, the firm noted.
The euro hit a five-week high against the yen, but by mid-morning the single currency pulled back. The euro last traded at 101.48 yen, down 0.4 percent, after earlier rising as high as 102.20 yen.
GREEK TALKS UNSETTLED
Greece's tortuous negotiations over a debt swap with private creditors entered a new phase on Thursday with focus on how much the European Central Bank and other public creditors may need to contribute.
"The Greek debate is a continued game of brinksmanship," McCormick said. "I still don't see any progress any on that."
In a potentially encouraging sign, however, Italy's 10-year government bond yields fell below 6 percent for the first time in six weeks on Thursday.
"The markets are trading in a way that they believe a disorderly Greek default is unlikely," said Alan Ruskin, head of G10 currency strategy at Deutsche Bank in New York. Still, he noted, "we've seen so many false alarms in terms of resolution."
The Australian dollar hit a three-month high of US$1.0688, while the New Zealand dollar traded as high as US$0.8235, its highest level since Oct. 28.
The dollar slipped 0.4 percent to 77.48, according to Reuters data. Strong technical resistance was cited around the 200-day moving average now at 78.33 yen.
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