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Euro surges on positive economic outlook

Friday, February 01 12:51:25

The euro hit a 33-month high against the yen and a 14-month peak against the dollar today, lifted by improving euro zone manufacturing data and bets of a firm U.S. jobs number.

News that banks will repay less than expected in European Central Bank three-year loans next week dented some demand for the euro, but losses were limited by optimism the worst of the region's debt crisis is over.

A Purchasing Managers' Index (PMI) survey showed euro zone factories had their most resilient month in nearly a year during January, helped by solid German output.

The euro rose more than 1 percent to hit 126.17 yen, its highest since April 2010, before pulling back to last trade at 125.74 yen.

Against the dollar, the euro broke above an options barrier at $1.3650 to hit $1.3675, its strongest since November 2011. It pared gains after the ECB announcement to trade at $1.3650, up 0.5 percent on the day.

"The PMIs this morning continued to maintain a pretty strong bid for the euro. It seems the path of least resistance is towards the euro going higher," said Jeremy Stretch, head of currency strategy at CIBC World Markets, adding the next target for the euro is the psychologically important level of $1.37.

"We saw a little pullback (after the ECB announcement) but it still seems markets are biased towards trying to test the topside."

Banks will pay back another 3.5 billion euros of emergency loans from the ECB next week, further deflating the central bank's balance sheet at a time when the U.S. Federal Reserve and Bank of Japan are pumping cash into their economies.

Although next week's repayment total is less than the market had expected, prompting some investors to sell the euro, the tightening monetary conditions were overall seen as positive for the shared currency.

The yen remained under heavy selling pressure on expectations of aggressive easing in Japan, with the dollar up 0.4 percent at 92.09 yen, having earlier hit 92.29 yen on trading platform EBS, its highest since June 2010.

Traders said the yen's drop accelerated as market players in Asia targeted and breached option barriers at 92.00 yen against the dollar and 125.00 yen versus the euro.

Selling the yen has become a one-way bet with Japanese Prime Minister Shinzo Abe heaping relentless pressure on the Bank of Japan to ease monetary policy aggressively to jolt the economy out of a decade-long malaise. (C ) Reuters