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Euro recovers after economic data

Friday, March 21 12:09:26

Data showing a record euro zone current account surplus in January helped the euro rise against the dollar for the first time in three days today, with capital inflows providing solid support for the common currency.

With the European Central Bank showing little inclination to ease monetary policy soon, analysts said inflows into rate-sensitive money markets are likely to continue alongside robust demand for European stocks and peripheral euro zone bonds.

The euro rose 0.1 percent to $1.3804, recovering from a two-week low of $1.3749 struck on Thursday, with signs the ECB's balance sheet is still contracting offering support.

It was nevertheless on track to for its first weekly loss since late January against the dollar, which has been lifted along with U.S. bond yields as markets have revised forward their expectations of U.S. interest rates will rise.

Comments by Federal Reserve chief Janet Yellen this week have prompted markets to price in a U.S. rate hike early next year and if second-quarter U.S. data comes in strongly that could also increase the dollar's allure.

Fed officials including Richard Fisher, James Bullard and Narayana Kocherlakota are due to speak later on Friday and could offer more guidance on the U.S. central bank's thinking after Yellen surprised markets mid-week.

"There is a reassessment of Fed rate hike expectations that is taking place which is keeping the dollar pegged back," said Manuel Oliveri, FX strategist at Credit Agricole.

"The euro, on the other hand, is being supported by inflows into European stocks and together with the current account situation, we should see a bit of upside in the euro."

Data from the ECB on Friday showed the euro zone's current account surplus hit a record level in January, when portfolio investments rose to 16.9 billion euros.

The euro's rise saw the dollar index slip to 80.13, off a three-week high of 80.354 set on Thursday.

"Investors are awaiting for further confirmation from the Fed on its rate path especially if U.S. data in the second quarter starts to look up," said Geoffrey Yu, currency strategist at UBS. "For us, the dollar is a buy on dips."

With the dollar pausing, the safe-haven yen and Swiss franc outperformed as traders grew cautious going into the weekend amid rising tension between Russia and the West following Moscow's annexation of Crimea. Russian stocks fell sharply as investors digested the impact of U.S sanctions over the crisis in Ukraine.

EU leaders meeting in Brussels are also mulling wider economic sanctions.

The dollar fell 0.15 percent against the yen to 102.25 after topping out at 102.69 on Wednesday, while the euro was flat against the yen at 141.05 yen. The dollar was also lower against the Swiss franc at 0.8830 francs.

Meanwhile, the Chinese yuan steadied after hitting a 13-month low with traders saying there were signs that the currency may be finding a base.

The yuan has shed more than 1.2 percent so far this week - a record weekly loss - after the central bank last weekend doubled the currency's permitted trading range to 2 percent either side of the fixing. (Reuters)