* Euro highest since mid-November; rally may fade
* Dollar struggles as safe-haven flows dry up
* Aussie at 4-week high vs dlr, sterling 2-1/2-month high
(Updates prices, adds detail)
By Steven C. Johnson
NEW YORK, Feb 1 (Reuters) - The euro hit a 2-1/2-month high
on Tuesday, driven above $1.38 by solid global manufacturing
data, though analysts said risk appetite could fade if worries
resurface about Europe's ability to manage its debt crisis.
Markets considered the crisis in Egypt contained, easing
fears it could spread across the Middle East, and that dented
safe-haven demand for dollars. At least 1 million people
gathered in Egypt to demand the resignation of President Hosni
Mubarak, who said he would not run for reelection. For details,
see []
The euro rose as high as $1.3844 <EUR=>, its highest since
early November, with gains accelerating after it broke above
resistance at $1.3786. A close above $1.3750 would open the way
for a run to $1.40, "a slam-dunk unless we get some kind of
surprise from Europe about the sovereign debt crisis," said Dan
Dorrow, head of research at FX execution firm Faros Trading.
Extending its gains further may prove difficult, though,
and some traders said the $1.40 level would provoke selling.
"The euro anywhere near $1.40 is probably a sell if we get
up there," said Firas Askari, head of FX trading at BMO Capital
Markets in Toronto. "I still think there are some core
fundamental issues in Europe that have not been addressed."
"When the whole world starts buying and talking about the
strength of the euro," he added, "it's probably a good time to
start fading it." The euro was last up 1 percent at $1.3831.
The European Union is said to be working on a plan to
reduce Greece's debt burden.
The dollar, which saw a safe-haven bid late last week when
protests in Egypt intensified, fell broadly as risk appetite
returned, hitting a four-week low of 81.33 yen <JPY=> and
falling 0.9 percent against the Swiss franc to 0.9355 francs
<CHF>.
The Australian dollar rose 1.5 percent to $1.0115 <AUD=D4>,
just off a four-week high, after policy makers gave an upbeat
assessment of the domestic and global economy. []
Traders said demand from Middle Eastern investors helped
lift the euro while Asian sovereigns were also seen buying back
euro positions sold earlier in the day.
ECONOMIES ON MEND, PRICES PRESSURES GROWING
Data showing the U.S. manufacturing sector grew at its
fastest pace in nearly seven years last month bolstered hopes
the economy was gaining traction, encouraging investors to wade
into risky trades. Separate data showed Germany's jobless rate
fell while euro zone factory activity accelerated.
Global manufacturing surveys also showed rising raw
material prices, which analysts said would likely add to upward
pressure on currencies from emerging Asia.
European Central Bank President Jean-Claude Trichet has
also flagged inflation risks lately, and investors expect him
to retain a hawkish tone on Thursday. []
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
For link to euro zone PMI data []
Graphic on global inflation http://r.reuters.com/wuz46r
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
Implied interest rate futures <ECBWATCH> suggest a nearly
80 percent possibility the ECB will raise rates by 25 basis
points in August from the current record low of 1.0 percent.
High U.S. unemployment, meanwhile, and still manageable
core inflation has investors betting the Federal Reserve will
keep interest rates near zero for some time yet.
"Even with good news, the Fed will be on hold for a long
time. That will increase flows into emerging markets and the
euro," Dorrow said.
Speculation that rates will rise faster in Europe than in
the United States has kept the two-year yield spread between
German <DE2YT=TWEB> and U.S. government bonds <US2YT=RR> at
around 80 basis points, its widest in two years.
A record high for a UK manufacturing PMI helped drive
sterling to a 2-1/2-month high above $1.61 <GBP=D4> and boosted
expectations for an interest rate hike my mid-year.
(Additional reporting by Wanfeng Zhou in New York; Editing by
Leslie Adler)
