Euro rebounds as dollar pauses for breath

LONDON (Reuters) - The euro rose against the dollar for the first time in two weeks on Thursday, recovering from a slump to a 12-year low in Asian trading as the greenback took a pause from its broad upward surge.

However, traders said the euro's gains would prove short-lived, with many expecting the common currency to fall to parity with the dollar in coming months for the first time since 2002. Both technical indicators and options market pricing showed more losses are in store for the beleaguered currency.

On Thursday Bank of America Merrill Lynch became the latest major bank to revise its euro forecasts downwards. It now expects dollar parity by the end of the year, having predicted $1.10 in its previous projections.

The European Central Bank's launch of a 1.1 trillion euro bond-buying program this week has dented the euro's appeal by driving yields of many euro zone bonds to all-time lows. A 30-year German bond now offers a yield which is below a two-year U.S. Treasury note.

In contrast, investors are betting that the U.S. Federal Reserve will raise interest rates in the coming months - a view bolstered by strong jobs data last Friday but which could lose support if U.S. retail sales numbers due at 8.30 a.m. ET come in weaker than expected.

The euro rebounded 0.9 percent to $1.0637, still not far from its 12-year low of $1.04940 hit overnight but on track for its biggest daily gain since early February.

"The market was definitely wrong-footed by the move this morning, which I suspect initially began as a profit-taking exercise for some dollar longs," said Daragh Maher, a currency strategist at HSBC in London.

"What (it) shows is that the market had become too one-way in its mindset. This has reintroduced a bit of two-way risk, and a bit of pain, I'm sure."

The dollar index, which measures the greenback against six major currencies, lost 0.8 percent ahead of the retail sales data to 98.979, having hit 100.06 <.DXY> for the first time since early 2003 overnight.

"Unless we get protests from other trading partners about a weakening euro, I think the trend will continue. There have been some noises from the U.S. but as long as the Europeans are happy with the currency weakness, the euro can go down further," said Yujiro Goto, currency analyst at Nomura.

Meanwhile, the New Zealand dollar advanced after the Reserve Bank of New Zealand sounded less dovish than markets had positioned for and kept interest rates steady at 3.5 percent.

The kiwi was at $0.7401, up 1.5 percent and pulling away from a five-week trough of $0.7192 struck on March 11.

(Editing by Gareth Jones)

WhatsAppFacebookTwitterLinkedinBeloudBluesky