FOREX-Euro trades 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

* Dollar rises from two-week low versus yen

* Speculators decrease bets in favor of dollar in latest

week

By Julie Haviv

NEW YORK, Oct 25 (Reuters) - The euro rose against the

dollar on Friday, hovering close to a two-year high, as souring

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 the recent soft euro zone data. That should keep

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

Next week investors will focus on a Fed policy meeting. The

central bank will likely signal it will keep the current size of

its bond-purchase stimulus, a negative for the dollar.

After a 16-day shutdown earlier this month, the government

is catching up on issuing a backlog of economic data.

The data so far has largely supported the stance that the

U.S. central bank should not change its current bond-purchase

stimulus, called quantitative easing, to support an economic

recovery that has slowed since late summer.

Economists expect Fed policymakers will decide to maintain

their $85 billion monthly purchases of Treasuries and

mortgage-backed securities when they meet next Tuesday and

Wednesday. They projected the Fed would keep this pace of buying

until March.

In late afternoon New York trading, the euro was up

up 0.1 percent at $1.3808, not far from an earlier peak of

$1.3832, its highest since November 2011.

The euro is poised to end the week up nearly 0.9 percent,

marking its second straight weekly gain. It has risen 2.1

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

Currency speculators decreased their bets in favor of the

U.S. dollar to the lowest level since February in the week ended

Oct. 1, according to data from the Commodity Futures Trading

Commission released on Friday.

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 134.48 yen

.

The dollar was flat against a basket of six major currencies

at 79.178, 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 from 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 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.

The dollar last traded up 0.1 percent at 97.38 yen,

off a two-week low of 96.92 yen, according to Reuters data.

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