LONDON: The euro managed only short-lived gains against the dollar on Monday after a surprisingly positive German business sentiment survey, with investors worried about the problems of euro zone peripheral economies opting to sell into the currency's bounce.
The dollar moved broadly higher, rising against the Japanese yen and the Swiss franc, as last week's drop in US bond yields took a breather. US bond yields have risen steadily for most of March as the world's largest economy showed signs of improvement, lending solid support to the dollar.
In Europe, the German Ifo think tank's business climate index rose to 109.8, beating expectations of a steady reading of 109.6 and surprising many traders who were bracing for a soft number after last week's weak reading of flash purchasing managers' indices (PMIs) across the euro zone.
The euro rose to above $1.3260 from around $1.3235 before the influential German survey was released, but quickly gave up those gains to trade at $1.3200, down 0.55 percent on the day.
Traders said Middle-Eastern investors were big sellers, with bids cited at $1.3150. Traders said that with the euro failing to breach resistance at $1.3302 last week, a level representing a 61.8 percent retracement of its late February to mid-March fall, the bias was for losses.
Investors shied away from chasing last week's bounce as the euro faced a slew of risk events this week, also including bond auctions in Italy and a meeting of euro zone finance ministers. Italy is seeking to raise up to 7.5 billion euros amid renewed pressure on peripheral euro zone debt.
"The German Ifo data did give the euro a bit of a leg higher, but it also highlighted the dichotomy between the German economy and the strugglers in the euro zone periphery," said Steve Barrow, G10 currency strategist at Standard Bank.
"We also have tension creeping up in the euro zone peripheral debt market and that should keep the euro's bias more towards $1.30 than towards $1.35."
Barrow said the focus would be on Spain's budget on Friday, as Prime Minister Mariano Rajoy juggles to present a tough budget amid rising unemployment. His ruling party suffered a setback at the weekend, failing to secure an outright majority in a regional election.
The euro also lost ground against the yen, easing to 109.15, well below a five-month high of 111.43 yen.
DOLLAR FIRMER
The dollar advanced against the Japanese currency, gaining 0.6 percent to 82.80 yen and inching closer to an 11-month high of 84.19 struck on March 15. Strong support is seen at the 38.2 percent retracement of its February-March rise at 81.06 yen.
Traders said they would prefer to buy the dollar and sell the yen, with repatriation inflows ahead of the Japanese fiscal year-end on March 31 unlikely to change the bearish sentiment towards the Japanese currency over the medium term.
"As long as the US economy shows signs of outperforming the others, the dollar would be supported," said Paul Robson, currency strategist at RBS Global Banking.
"We are expecting the dollar/yen pair to trade in a 80-85 yen range with a risk of an upside break. A lot will depend on whether the economies outside the US also pick up," he added.
The dollar index, a gauge of its performance against a basket of major currencies, rose 0.36 percent to 79.636, having recovered from a two-week low last week.
The yield on US 10-year notes rose about two basis points to 2.25 percent on Monday. But any signs of dovishness from Federal Reserve Chairman Ben Bernanke who is scheduled to speak at 1200 GMT, could have an impact on the dollar.
The dollar/yen currency pair has a strong correlation with the spread between US and Japanese bond yields. A wider spread tends to boost the greenback while a narrowing one pushes the dollar lower.
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