* Euro trades above $1.31 for first time since early May
* Focus now on whether euro can climb above $1.3125
* Investors buy euros before month-end
(Updates prices, adds details, comment)
By Nick Olivari
NEW YORK, July 29 (Reuters) - The euro broke above $1.3100
to a 12-week high against a broadly weaker dollar on Thursday
as supportive European data prompted investors to bet the
European economy is on a better track compared with the U.S.
The euro's advance started early in the session after a
jump in euro zone economic sentiment to a 28-month high and a
decline in German unemployment. For details, see
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This contrasted with recent weak data from the United
States that has weighed broadly on the dollar. Investors are
mindful of figures on Friday expected to show slower second
quarter growth in the world's largest economy.
The lackluster U.S. data has reinforced the view benchmark
interest rates will remain at record lows in the U.S. well into
2011, while euro-denominated assets still offer higher returns
to investors.
Traders cited demand for euros from an Asian central bank
in early European trade and they also welcomed news that the
Italian government's 25 billion ($32.54 billion) package of
austerity measures cleared a final hurdle. The package is
intended to shore up Italy's public finances. []
"Economic resilience in Europe... despite the formidable
sovereign credit headwinds, continues to fuel an unwinding of
bets against the euro and push it higher across the board,"
said Omer Esiner, chief market analyst at Commonwealth Foreign
Exchange, in Washington, D.C.
But Esiner warned that while the euro is likely to enjoy
continued support over the near-term, especially if U.S. data
remains weak, its gains may prove limited if concerns about a
slowing U.S. economy widen to include the broader global
economy.
In mid afternoon New York trade, the euro <EUR=> was up 0.8
percent at $1.3091, its strongest since May 4. The single
currency briefly traded at $1.3106.
The euro has risen around 7 percent versus the dollar this
month and the next key resistance level for the single currency
is seen at $1.3125, the 38.2 percent Fibonacci retracement of
the peak-to-trough move from November 2009 to June.
CitiFX Technicals said there was a plethora of resistance
in the euro/dollar $1.3080 and $1.3115 whch has been pivotal to
varying degrees for the last 1-1/2 years
Further bolsterling the euro were investors selling dollars
before the end of the month to hedge the currency exposure on
their holdings of U.S. assets, Citibank analysts said.
Euro gains accelerated once the currency went over $1.3050,
a level in which automatic buy-orders were triggered, forcing
other investors to unwind bets against the euro to prevent
further losses, traders said, a practice known as short
covering.
Citibank analysts said investors continued to buy U.S.
equities into the end of July as U.S. stock markets
outperformed other global equities.
This suggests that investors, on balance. will be net
sellers of dollars to bring their hedges in line with the
increased value of their U.S. assets," they said, adding that
the signal to sell dollars was "quite strong".
IN OTHER CURRENCIES
The dollar fell 0.6 percent against the yen to 86.87 yen
<JPY=>.
Southern hemisphere currencies were active with the New
Zealand dollar <NZD=> gaining 0.7 percent to $0.7253. The kiwi
recovered from an earlier fall after the central bank raised
interest rates by a quarter point, as widely expected, but
warned that further hikes could be more gradual.
[]
The New Zealand dollar's recovery was aided by a rise in
the Australian dollar <AUD=>, which climbed 1.2 percent to
$0.9008.
Analysts warned however that the gains in the Australian
dollar may not last.
Local Australian inflation concerns are probably overblown,
said William Reekstin, a director with the global market
markets group, Direct Access Partners in New York, and as that
realization increases, the prospect of higher interest rates
will fall, reducing the attractiveness of the aussie against
its U.S. counterpart.
(Additional reporting by Naomi Tajitsu in London)
(Reporting by Nick Olivari and Vivianne Rodrigues; Editing by
Theodore d'Afflisio)
