NEW YORK: The euro on Friday rose to its highest in more than two months against the dollar and its strongest versus the yen in nearly four months, boosted by general optimism about the euro zone crisis including next week's round of cheap money from the European Central Bank.
The euro, rising for a third straight day, broke above the key 100-day moving average against the dollar for a second consecutive session. It also breached key resistance around $1.3435, the 50 percent retracement of the decline from the late October peak to the mid-January trough.
The yen, meanwhile, tumbled across the board in a downtrend that started with the Bank of Japan's recent monetary easing. Japan's trade deficit, widening interest rate differentials with the United States favoring the dollar and rising crude oil prices also have hurt the yen's prospects.
"I see this euro rally being sustained possibly to $1.36-$1.37 next week," said Douglas Borthwick, managing director at Faros Trading in Stamford, Connecticut. He cited the improvement in the euro swaps market, which has started to show an easing of funding strains in Europe from December's extreme levels.
The cross-currency basis swap, or the relative premium for swapping euro LIBOR for dollar LIBOR, traded at -58.250 basis points on two-year contracts on Friday, off record peaks of -92.500 in mid-December.
Narrower spreads reflect reduced demand to borrow US dollars in the currency forward market and often supports the euro's spot value against the dollar.
Borthwick added that the ECB's three-year long-term refinancing operation (LTRO) next week could help the euro's cause. Estimates suggest that the LTRO would draw bids of anywhere between 500 billion-1 trillion euros, setting risk appetite on fire.
"A big take-up (of the LTRO) will support risk broadly, as easier bank and sovereign funding conditions reduce systemic risk globally," said Calvin Tse, currency strategist, at Morgan Stanely in London.
He added that this will likely "prompt the markets to believe a significant amount of this cash will be used to fund sovereign carry trades," in which euro zone banks use their new three-year funding to buy the debt of the region's sovereigns with a similar duration.
ECB Governing Council member Nowotny on Friday, however, said he doesn't see any need for more LTRO after next week's operation.
In mid-afternoon trading, the euro was last up 0.7 percent on the day at $1.34545, off an earlier peak of $1.34869, its highest since early December.
Market players said the euro rally had good momentum after it broke through the 100-day moving average around $1.3306 on Thursday, and took out a reported option barrier at $1.34 in early European trade on Friday.
The next key level to watch out for will be the $1.3623 area, which is the 61.8 percent retracement of the late October to January drop.
The euro zone will be the focus of this weekend's G20 meeting in Mexico City. European Union leaders are likely to seek a significant increase in the resources available to the International Monetary Fund to help the region fight the debt crisis.
YEN WEAKNESS
The yen was also one of the biggest movers of the day.
The dollar hit a fresh 7-1/2-month high at 80.970 yen on trading platform EBS and was last 80.941, up 1.3 percent on the day.
Greg Anderson, senior currency strategist at CitiFX in New York said the he expects the yen's drop to reverse and expects a new floor to be set at 78.00 or 79.00.
Short-term players triggered weak stop-loss orders above Wednesday's peak of 80.41, helping the dollar break above a major chart resistance point of 80.42 yen, which is the 50 percent retracement of its fall from the 2011 high around 85.50 yen to the all-time low of 75.31 yen.
The euro rose to a fresh 3-1/2-month high of 109.03 yen , well above this year's low of 97.04 yen hit on Jan. 16. It last traded at 108.94, up 1.9 percent on the day.
Dollar/yen traditionally has a strong correlation with short-term Japanese-US yield spreads. US Treasury yields are not expected to rise much further due to the Federal Reserve's pledge to keep rates exceptionally low until at least 2014, while Japanese 2-year government bonds are already extremely low.
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