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Euro, showing fresh life, reclaims parity

NEW YORK: The euro blasted sharply higher on Tuesday, rocketing above the psychologically key level of one-on-one to the dollar for the first time in a month as US stock markets wobbled.

The euro resurfaced above the $1.00 level overnight following steep declines by US equities on Friday, finding additional lift from speculation about a euro-zone interest rate hike and sizable gains against the sinking yen.

Losses by major US stock indices out of the starting blocks on Tuesday accelerated waves of short-covering, powering the euro to a one-month high of $1.0078, a gain of more than 2 percent on the day.

But a late rebound by the Dow Jones industrial average took a bit of the steam out of the euro's rally as dealers booked profits, and the currency eased back to close at $1.0038, nearly 1.7 percent higher on the day.

"I think the market was waiting for a bit of a sell-off in the US equity market to diversify some of their holdings," said Russell LaScala, senior trader at Citibank.

Traders said the euro's moves were triggered in part by heavy selling of yen for euros as the single currency shot 1.19 percent higher to a four-month peak of 111.73 yen, before easing at the close to 111.21 yen.

"The euro/yen cross is clearly the hot currency pair that everyone in the market is trading," said Greg Anderson, currency strategist at FleetBoston.

"The flurry of activity overnight sent the whole speculative community even further long of euros relative to the yen, and the dollar as well," he said.

Anderson said he expected the euro would likely hold its gains against the yen, which has fallen sharply against major currencies in recent weeks as storm clouds have closed in on Japan's economic outlook.

But he said fears of a correction on Wall Street were overblown and the dollar's downside was limited, with the $1.01 area representing the upper end of a trading band stretching down to the 96-cent area.

"In my opinion, the euro is at an attractive level to sell," Anderson said.

The dollar's declines against the euro spilled over into losses against the Japanese yen as the US currency fell from a six-month high of 111.73 overnight to close at 110.82 yen in New York.

The year-old euro has been pressured below the critical parity level with the dollar on the belief the US economy would continue to outperform that of Europe.

But many traders are looking for the tide to eventually turn for the currency of the 11-nation euro zone, as the currency's price action begins to match pace with signs of improvement in Europe's economy.

Later this week, the currency market will be keenly focused on fresh economic news from the United States and Europe, with a final revision to fourth quarter US gross domestic product and the euro zone's December industrial production data both due Friday.

"I think the message that most will take away from that is while the US is still in the lead. Europe is catching up quite quickly," which could give the euro more room to rise, said J.P. Morgan currency analyst Jim McCormick.

Overnight, ECB interest rate speculation was stoked by Bundesbank President Ernst Welteke's comments that the euro zone supply of liquidity remained accommodative even after a quarter percentage point rate hike by the ECB on Feb. 3.

His comments, released a day before the publication of Tuesday's edition of Germany's Boersen-Zeitung, were seen as suggesting the ECB had room to tighten monetary policy.-Reuters