* Euro rises above $1.37 in volatile trade
* Traders expect euro to test highs just below $1.38
* Sterling tumbles after UK Q4 GDP shrinks unexpectedly
(Updates prices, adds details, comment)
By Wanfeng Zhou
NEW YORK, Jan 25 (Reuters) - The euro climbed to a
two-month high above $1.37 on Tuesday and looked poised to
extend gains as momentum turned increasingly bullish after the
currency's recent break above key chart levels.
A pledge by the U.S. Federal Reserve, which concludes a
two-day policy meeting on Wednesday, to continue its $600
billion bond-buying plan could further help the euro versus the
dollar, analysts said. A statement will be released at around
2:15 p.m. (1915 GMT) on Wednesday.
"If you look at the technical factors, which are going to
be more important in the short run, there's probably scope for
a retest of those previous highs just below $1.38," said
Vassili Serebriakov, currency strategist at Wells Fargo in New
York.
"Our stance is that the European authorities will do enough
to contain the debt crisis in the coming months. And that
leaves the dollar vulnerable against the euro as long as the
Fed continues its Treasury purchases," he added.
The euro's rise in late New York trade on Tuesday extended
a six-day rally against the dollar. Traders said the euro's
solid break above the $1.35 area last week was significant and
suggested a run toward $1.3786, the Nov. 22 high.
In late trading, the euro rose 0.4 percent to $1.3695,
after having earlier risen as high $1.3705 <EUR=EBS> on trading
platform EBS.
The euro zone's single currency has gained about 6.5
percent since hitting a low around $1.2860 on Jan. 10.
Near-term resistance lies around $1.3738, the 61.8 percent
retracement of fall that began in early November and ended two
weeks ago. A break above that would add to bullish momentum.
Traders said early euro volatility was partly due to the
European Financial Stability Facility's (EFSF) inaugural debt
issue.
The order book for the issue closed with bids valued at 43
billion euros for the 5 billion euros of paper on offer, a
source at the EFSF said. []
Speculation the new issue would be massively oversubscribed
boosted the euro in early trade, but gains were eroded when
investors who built up euros to buy EFSF debt sold them back.
Gains were also limited after Guido Westerwelle, head of
German Chancellor Angela Merkel's junior coalition partners,
said that he was still not convinced the euro zone bailout fund
should be expanded. []
The dollar weakened broadly, falling just below 82 yen, as
U.S. bond yields fell. Lower yields make dollar-denominated
assets less attractive.
U.S. Treasury prices rose after a report that President
Barack Obama would propose a freeze on discretionary
non-security spending in his State of the Union address Tuesday
night. Solid demand at an auction of $35 billion of two-year
notes also pressured yields. See []
"The dollar/yen is the most sensitive to interest rate
differentials and we do not see that breaking down," said Mark
McCormick, currency strategist at Brown Brothers Harriman in
New York.
The dollar last traded down 0.3 percent at 82.22 yen
<JPY=EBS>, after falling as low as 81.97 yen on EBS.
Sterling dived after a surprise 0.5 percent contraction in
fourth-quarter UK gross domestic product, compared with
economists' forecasts of a 0.5 percent gain [].
The pound fell to a session low <GBP=D4> of around $1.5750.
It last traded down 1 percent at $1.5830. Against the pound,
the euro jumped almost 1.5 percent to its highest in
two-and-a-half months. <EURGBP=D4>.
"The UK GDP may be a warning sign of what is to come in
Europe. Market participants may reassess the rate hike
scenarios which had led to a short squeeze," said Lee Hardman,
currency economist at Bank of Tokyo-Mitsubishi UFJ in London.
A close below $1.5922 on sterling/dollar would be bearish,
said CitiFX Technicals in a note. Current moves argue for a
move to at least $1.5345, the bank said.
(Additional reporting by Nick Olivari and Julie Haviv; Editing
by Leslie Adler)
