FOREX-Euro near two-year high vs dollar; outlook stays positive

Reuters

* Euro hovers below two-year high vs dollar after soft

German Ifo data

* Common currency still on course for gains against a weak

dollar

By Julie Haviv

NEW YORK, Oct 25 (Reuters) - The euro hovered close to a

two-year high against the dollar on Friday as a souring of

German business morale did little to dent bullish sentiment

toward the euro zone common currency.

German Ifo business sentiment data fell unexpectedly for the

first time in six months, sparking concern about the impact of a

stronger euro on the region's exporters.

That followed sub-forecast euro zone private sector activity

surveys on Thursday, suggesting that recovery in the euro zone

has stalled.

Still, the euro's fall was minimal and many analysts say it

could rise toward $1.40 as investors seek alternatives to a

dollar hobbled by expectations the Federal Reserve will maintain

its current level of monetary stimulus.

"Traders continue to make the euro their favorite

anti-dollar trade in light of expectations the Fed will continue

its QE (quantitative easing) program well into the start of next

year," said Boris Schlossberg, managing director of FX strategy

at BK Asset Management in New York.

In contrast, Schlossberg noted that market participants do

not expect any change in the European Central Bank's monetary

policy despite recent the soft euro zone data. That should keep

the euro well bid, at least against the dollar, he added.

In afternoon New York trading, the euro was unchanged

at $1.3804, not far from an earlier peak of $1.3833, its highest

since November 2011.

The euro, at current prices, is up nearly 0.9 percent on the

week, its second straight weekly gain. It has risen 2.1 percent

month to date, with its annual gain at 4.6 percent.

Technical analysts said the euro faced stiff resistance at

Friday's $1.3833 peak, the 61.8 percent retracement of the

currency's fall between May 2011 and July 2012.

"The euro is due for a short-term correction and could drop

towards $1.3720," said Hans Redeker, head of global foreign

exchange strategy at Morgan Stanley. "But by the first week of

December it could be as high as $1.42."

He expected the euro to be one of the main beneficiaries of

a weaker dollar, and as euro zone banks sell assets to foreign

investors to shrink their balance sheets in preparation for an

ECB asset quality review.

Some euro zone officials have shown no concern about a

strong euro. ECB Executive Board member Joerg Asmussen was

quoted on Friday as saying the ECB is not concerned about the

level of the euro.

Omer Esiner, chief market analyst at Commonwealth Foreign

Exchange in Washington, however, thinks the ECB's tune on a

strong euro could change at some point.

"Euro zone officials are unlikely to sit idly while a rise

in the euro threatens to derail a fragile economic rebound,"

said Esiner. "Increased vocal opposition to euro strength by

policymakers will further limit the currency's gains."

Against the yen, the euro was up 0.2 percent at 134.42 yen

.

The dollar was flat against a currency basket of six major

currencies at 79.208, off a near nine-month low of

78.998. The dollar index's composition is dominated by the euro.

Economists reckon this month's 16-day U.S. government

shutdown shaved as much as 0.6 percentage point off annualized

fourth-quarter gross domestic product through reduced government

output and damage to consumer and business confidence.

However, some analysts said the euro could be vulnerable to

signs the euro zone's tentative recovery is losing steam,

especially with a strong euro seen hurting the region's

exporters. The euro's trade-weighted index was at

a two-year high.

The dollar was up 0.1 percent against the yen at 97.38 yen

, off a two-week low of 96.94 and above its 200-day moving

average, a key chart level, at 97.34, suggesting room for more

gains.

The dollar slightly pared gains versus the yen after the

Japan Meteorological Agency issued a 'yellow' warning early on

Saturday morning, Japan time, that a small tsunami would reach

the Japanese coast at Fukushima, site of a wrecked nuclear power

plant, after the U.S. Geological Survey reported a 7.6 magnitude

quake 231 miles to the east.

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