NEW YORK: The euro rose against the dollar for a second straight day on Thursday, hitting a one-week high, buoyed by a dip in benchmark Italian and Spanish bond yields, but ongoing fears about the euro zone debt crisis are likely to keep gains contained.
Demand for the dollar was dampened after US data showed new US claims for unemployment benefits rose last week to their highest level since January, raising concerns that the labor market was stalling.
That data added to speculation that the Federal Reserve may opt to embark on a third round of asset purchases, called quantitative easing. That would weigh on the dollar as it is tantamount to printing money.
"The weaker-than-expected jobless claims numbers reinforce the negative non-farm payroll number from last month," said Joseph Trevisani, chief market strategist at Worldwide Markets Woodcliff Lake, New Jersey.
"This will keep the dollar on the defensive as it brings up another stimulus response from the US Federal Reserve."
The dollar last traded down 0.1 per cent against the yen at 80.82 after reaching a high of 81.13, according to Reuter’s data.
Italian three-year borrowing costs jumped more than one percentage point at a bond auction compared to a month ago, but 10-year yields in both Italy and Spain edged lower for the day and the euro strengthened, as concerns over the region's debt seemed to ease.
ECB Executive Board member Benoit Coeure sought to calm debt-related jitters on Wednesday, saying the ECB still has its bond-buying programmed as an option to ease funding pressures for indebted countries.
"Spanish and Italian bond (benchmark 10-year) yields came down a bit and the outcome to today's Italian bond auction was good, but not great," said Nick Bennenbroek, head of currency strategy at Wells Fargo in New York.
"Nonetheless, there were enough favorable headlines abroad to prompt another day of gains for the euro."
The euro rose to a one-week high of $1.3186 and last traded at $1.3176, up 0.5 per cent on the day. Traders said it extended gains after stop loss buy orders were triggered on the break of $1.3155-60, forcing players to cut short positions in the common currency.
"The market is quietly putting the mini-crisis in the rear view mirror ... People are looking at putting risk back on in higher-yielding currencies," said Kit Juckes, currency strategist at Societe Generale.
Riskier assets also gained a boost as the higher-yielding Australian dollar jumped more than 1 per cent to a high of US$1.0439 after unexpectedly strong Australian jobs data.
However, analysts said the euros rise was partly the result of volumes remaining thin just after the Easter holiday and they still expected it to drop as concerns remain that the crisis could spread to much bigger economies like Spain or Italy.
"The response to the Italian bond auction and the performance of Spanish banks is an indication that problems for the euro are piling up," said Stuart Frost, head of Absolute Returns and Currency at RWC Capital, a fund manager.
"We are short euro against the dollar and expect it to fall below the $1.30 level towards $1.26 in the near term."
Analysts said even if risk appetite improves in coming days, the euro would underperform, especially against growth-linked currencies, because of the debt problems and concerns about the health of the region's banking sector. -Reuters