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Euro ends sails up but doesn't reach parity

NEW YORK: The euro rallied to a two-week peak on Wednesday after Germany's cabinet approved an investor-friendly tax reform package and Wall Street stumbled on fears that U.S. interest rates may again have to be hiked.

But the single currency failed to reach the psychologically key one-to-one level with the dollar and dealers said it may face an uphill battle to top the level now largely remembered as the springboard for this year's dramatic losses.

At the end of the day, the euro traded 0.85 percent firmer against the dollar at 99.38 cents after closing Tuesday's session at 98.54 cents. It also held a 0.44 percent gain against the yen at 108.26 yen.

The yen however topped the dollar and traded up 0.70 percent at 108.26 after options-related selling knocked the greenback from five-month highs.

"The euro had found support near the 97 cent area and since then it has rallied a bit, with the tax reform news, the Mannesmann/Vodafone deal and the U.S. stock market's losses proving to be mild positives for the currency," said ING Barings vice president John McCarthy.

German Chancellor Gerhard Schroeder's cabinet on Wednesday approved a draft tax-reform bill that would allow companies to sell corporate shareholdings without incurring tax.

Financial market players say the bill, which must be approved by parliament to become law next year, would improve the investment climate in Europe's largest economy.

Last week's blockbuster telecoms takeover of Mannesmann AG MMNGn.DE by Britain's Vodafone AirTouch Plc VOD.L also suggested that Europe would be more open to foreign investment than many had thought last year, aiding the euro. Showing early strength, the euro shrugged off weaker than expected German output data and mixed signals from senior European officials on the currency's recent weakness to climb as high as 99.64 cents.

Germany reported that output rose 0.7 percent in December from the previous month, well below the consensus forecast for a 1.3 percent rise.

The European Central Bank's chief economist Otmar Issing said the euro's fall could undermine public confidence in the new currency while German Finance Minister Hans Eichel said a softer euro helps exports and Ernst Welteke, president of Germany's central bank, said the new currency has room to rise.

Despite its strong start, the euro failed to reach parity with the dollar as traders remained convinced the U.S. economy would continue to outpace growth in Europe.

"The inability to get above parity is not a good sign for the euro and we suspect that we will test lower levels," said Rick Gomes, managing director of foreign exchange at HSBC in New York.

On the other hand, the euro retained some luster after the Dow Jones industrial average tumbled 2.36 percent amid fears that America's robust economy may overheat unless the Federal Reserve steps up its pace of credit tightening.

While higher interest rates often benefit a currency by attracting more capital into that country, declines in interest-rate sensitive stocks often wipe out that positive effect for the currency.

Elsewhere, the dollar hit stiff resistance around 109 yen after it was undermined overnight when it failed to break the psychologically significant 110-yen level.

The yen had come under sharp selling pressure this week after officials in Tokyo said Japanese gross domestic product likely shrank for two consecutive quarters at the end of 1999 a technical recession.

Japan's July-September gross domestic product data fell a revised 1.0 percent in real terms on Wednesday but analysts said dealers ignored the data as it was unchanged from the preliminary estimate.-Reuters