* Euro breaks technical barrier, at 2-month high vs dollar
* Confidence in Europe's handling of debt crisis helps
* Fed likely to stand pat; euro could extend gains
* Inflation, rate outlook help lift sterling
(Updates prices, adds details on speculative positions)
By Steven C. Johnson
NEW YORK, Jan 21 (Reuters) - The euro hit a two-month high
above $1.36 on Friday and its break of important technical
levels suggested more gains to come now that anxiety about a
euro zone debt crisis has started to wane.
The euro has outperformed the dollar in eight of the last
10 sessions, and Friday's breach of $1.3570 took it above the
50 percent retracement of its November-to-January slide. It was
last up 1 percent at $1.3615 <EUR=EBS>.
Traders said a solid break of $1.36 would target the
100-week moving average at $1.3640 and then $1.3736, the 61.8
percent retracement of a decline that started when the euro was
above $1.42 in November.
"Markets are clearly buying into the view that the European
debt crisis is being resolved with modest pain," said Steven
Englander, head of G10 FX strategy at Citigroup in New York.
The euro also hit a five-week high around 112.49 yen after
a break above a closely watched Japanese technical indicator
around 112 yen <EURJPY=R>, with a close above there seen as
bullish. The dollar slipped 0.5 percent to 82.55 yen <JPY=>.
Recent strong debt auctions in Spain and Portugal and talk
that officials were considering letting a European rescue fund
purchase government debt from troubled euro zone countries
heartened investors, narrowing euro zone credit spreads and
boosting European bank shares along with the euro.
NOT A SURE BET
Few investors expect the Federal Reserve, which meets next
week, to alter its commitment to loose monetary policy or its
plan to buy $600 billion in Treasury debt by mid-2011.
The European Central Bank, by contrast, recently warned of
rising euro zone price pressures, sparking speculation that it
could lift lending rates before the Fed does. Traders said that
could add to euro momentum next week.
UK inflation is above the Bank of England's target, though
policymaker Adam Posen said that a rate hike wasn't necessarily
imminent. Sterling <GBP=D4> rose 0.6 percent to $1.6008.
To be sure, after rising more than 4 percent against the
dollar since Jan. 10, the euro may be due for a correction.
Data showed speculators in the latest week were positioned
in favor of the euro for the first time in two months, which
could set up some profit-taking next week. For details, see
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Then there are the lingering debt uncertainties.
"The situation in Europe is still largely unresolved," said
Jason Polit, an analyst at Charles Schwab Private Client in
Phoenix. "Some sort of bailout for one or more of the
peripheral economies will likely occur eventually and that will
put downward pressure the euro."
Investors have worried about debt levels in Spain and
Portugal, with the latter often tagged as likely to require a
bailout similar to those extended to Greece and Ireland.
However, Spanish government bond yields fell Friday, with
the spread over German Bunds narrowing to its tightest since
mid-November, and Portuguese bond spreads also narrowed.
Polit, who manages around $235 million in assets for
clients, said he was still playing it safe, reducing
allocations in emerging markets and focusing more on developed
markets with manageable debt levels, such as Germany.
"It is best to stay guarded with so many questions still
unanswered about the euro zone," he said.
(Additional reporting by Julie Haviv and Gertrude
Chavez-Dreyfuss; Editing by Kenneth Barry)
