The euro rose to a two-month high against the dollar on Friday, helped by Asian sovereign demand and improving confidence in the eurozone, but its rally appeared on shaky ground as it neared key technical resistance. Expectations of a strengthened eurozone rescue fund and a strong German Ifo report were lending support to the euro, together with a more hawkish outlook from the European Central Bank recently, but debt problems were still in the background.
"A strong IFO print in Germany buoyed optimism, although the euro remains driven by speculation over talks of more concrete measures slowly emerging from European policymakers," said Chris Walker, currency strategist at UBS. The single currency hit a two-month high of $1.3569 on trading platform EBS, boosted by a stronger-than-expected German Ifo survey.. It broke past option barriers at $1.3550, though it eased a bit and was last at $1.3525, up 0.3 percent on the day.
Traders said major Asian sovereign accounts were also active in driving the euro higher, while the focus was on a key technical level at $1.3576, the 50 percent retracement of the euro's fall from November to January. The single currency has gained more than 1 percent against the greenback since the start of year, driven by growing expectations that eurozone policymakers will arrive at a more durable solution to the peripheral debt crisis and a hawkish ECB which last week warned about price pressures.
Still, doubts remained whether the euro could hold gains. "This euro reaction seems overdone as it's highly unlikely the ECB will raise rates soon and there's been nothing concrete on the rescue fund," said Raghav Subbarao, currency strategist at Barclays Capital.
Spain is planning to force its regional savings banks to become conventional banks and seek stock market listings, a source familiar with the matter told Reuters. Spanish government bond yields fall, with the spread over German Bunds narrowing to its tightest since mid-November, while Portuguese bond spreads also came in.
The euro rose to five-week highs around 112.24 yen, making a technical break above a closely watched Japanese indicator, the Ichimoku cloud, in the 112 yen area. A daily close above the cloud would give the euro potential to rally further.
The euro's rally helped to knock the dollar index down 0.4 percent to 78.50, not far from a two-month low of 78.303 hit on Wednesday, while it lost 0.3 percent to 82.74 yen. The Australian dollar was flat at $0.9886. The Aussie came under pressure on Thursday when strong Chinese data renewed worries the world's second-biggest economy could take a tougher stance on fighting inflation this year, and ultimately slow its demand for commodities.