NEW YORK: The euro leaped to its highest level against the dollar in 10 weeks and to its strongest since November versus the yen on Thursday as better-than-expected German data offset a dour economic forecast from the European Commission.
The single currency retreated from highs after the EU's executive said the euro zone economy is heading into its second recession in just three years and the wider European Union will stagnate, warning that the currency area has yet to break its vicious cycle of debt.
Optimistic news about Germany, however, ultimately had investors favoring the euro.
"We're clearly in a bit of a risk-on mode following the strong German data and that should remain the main driver of activity," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.
German business sentiment rose for a fourth month running in February, raising hopes that Europe's largest economy is improving and will avoid recession despite the problems facing indebted euro zone countries.
In early New York trade the euro was up 0.4 percent at $1.3292. That was off an overnight session high of $1.3342, which was its strongest since mid-December, when it broke above resistance at the 100-day moving average around $1.3305 and the Feb. 9 high of $1.3322.
Concerns about the potential risks in implementing Greece's latest bailout deal amid the region's debt crisis is expected to limit gains for the euro, with some seeing the currency struggling to hold gains above $1.33.
Traders cited talk of Middle East accounts selling dollars, while the euro was buoyed also by investors cutting bearish bets against a number of currencies. Sterling in particular was hit by concerns about further UK monetary easing.
Against the yen, the single currency rose to 106.86 yen, its strongest since mid-November as the Japanese currency remained under pressure after recent monetary easing there. It was last at 106.72 yen, up 0.4 percent on the day.
"The euro will probably reverse this uptrend because the PSI deal on Greece still has to be done and we are edging closer to the March 20 deadline (when Greek bond redemptions are due) so there are many things that could wobble," said Ankita Dudani, currency strategist at RBS.
She added it would be tricky for the euro to break firmly out of its $1.30-$1.33 range. Morgan Stanley analysts also said in a note to clients that they continue to advise selling euro/dollar on rebounds.
Focus will soon turn to the European Central Bank's second long-term refinancing operation, due next week. Although a high take-up could give the euro and other riskier assets a short-term boost, in the longer-term there are worries that such ECB measures amount to quantitative easing and will weigh on the single currency.
The ECB is expected to lend nearly 500 billion euros to banks, although some forecasts go as high as 1 trillion euros.
The euro also rose to a 10-week high versus sterling after Bank of England minutes on Wednesday raised the possibility of more quantitative easing later in the year.
DOLLAR FALLS VS SWISS FRANC, YEN
The dollar fell to a 3-1/2 month low versus the Swiss franc of 0.9035 francs, with traders saying stop-loss sell orders were triggered on breaks below 0.9066 and 0.9050 francs.
This also caused the euro to dip against the franc to 1.2041 francs after breaking through a reported options barrier at 1.2050 francs. The pair edged nearer to the 1.20 franc floor the Swiss National Bank has pledged to defend.
The dollar rose 0.1 percent against the yen to 80.28, off a seven-month high of 80.406 yen hit on Wednesday as Japanese exporters and short-term players took profit above 80 yen and ahead of a barrier reported at 80.50 yen.
While part of the reason for the yen's recent weakness is the Bank of Japan's surprise easing of monetary policy last week, there is now growing momentum as key support levels give way, spurring more selling.
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