* Euro rises to 2-mth high, near key retracement at $1.3576
* German IFO, expectations of euro zone safety fund help
* Implied volatilities subdued despite euro's gains
* Spain has plans for savings banks, Portugal vulnerable
(Recasts lead, adds quotes, updates prices, changes byline)
By Julie Haviv
NEW YORK, Jan 21 (Reuters) - The euro jumped to a two-month
high against the U.S. dollar on Friday, driven by Asian
sovereign demand and improving confidence in the euro zone, but
its two-week-long rally could prove fleeting as it nears key
technical resistance.
Expectations of a strengthened euro zone rescue fund and a
strong German Ifo business confidence report supported the
euro, along with a more hawkish outlook from the European
Central Bank recently, but debt concerns still weighed.
The euro, which outperformed the dollar in eight of the
past 10 sessions, hit a two-month high of $1.3569 on trading
platform EBS, boosted by a stronger-than-expected German Ifo
survey. [].
It broke past option barriers at $1.3550, though it eased a
bit and was last at $1.3543, up 0.5 percent on the day.
rally further.
The euro's rally helped to knock the dollar index down 0.5
percent to 78.418 <DXY.>, not far from a two-month low of
78.303 hit on Wednesday.
Against the yen, the dollar also lost 0.3 percent to 82.70
yen <JPY=>.
Jason Polit, a certified financial analyst at Charles
Schwab Private Client in Phoenix, said the strength of the euro
has been based on confidence rather than tangible resolutions
to the euro zone's debt crisis, leaving the euro vulnerable.
"The situation in Europe is still largely unresolved," he
said. "Some sort of bailout for one or more of the peripheral
economies will likely occur eventually and that will put
downward pressure the euro."
Polit, who manages assets around $235 million for clients,
said they have rebalanced portfolios, 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.
Traders said major Asian sovereign accounts were also
active in driving the euro higher, while the focus was on a key
technical level at $1.3576, the 50 percent retracement of the
euro's fall from November to January.
The euro rose to five-week highs around 112.24 yen
<EURJPY=R>, making a technical break above a closely watched
Japanese indicator, the Ichimoku cloud, in the 112 yen area. A
daily close above the cloud would give the euro potential to
rally further.
Despite sharp currency moves, implied volatilities, which
may reflect the market's overall sentiment, remained subdued
on Friday. Front-end euro/dollar volatility <EUR1MO=> on Friday
stayed pinned on the 12 percent handle, trading at 12.10, a
touch softer from Thursday.
One-month implied vols on dollar/yen <JPY1MO=>, were little
changed at 9.95 percent and traders said there were very little
flows in the currency pair. But vol trading should become more
active, traders said, if dollar/yen breaks above 84 yen.
The euro has gained more than 1 percent against the dollar
since the start of year, driven by growing expectations that
euro zone policymakers will arrive at a more durable solution
to the peripheral debt crisis and a hawkish ECB which last week
warned about price pressures.
Still, doubts remained whether the euro could hold gains.
"This euro reaction seems overdone as it's highly unlikely
the ECB will raise rates soon and there's been nothing concrete
on the rescue fund," said Raghav Subbarao, currency strategist
at Barclays Capital.
"We think Portugal will have to be bailed out eventually.
After that the euro can rise further as Spain we believe is
solvent, but the euro rally is not sustainable here," he
added.
Spain is planning to force its regional savings banks to
become conventional banks and seek stock market listings, a
source familiar with the matter told Reuters. []
"Our core view continues to be that we will see rapid
shifts in sentiment towards the EUR, which will cause ongoing
volatility, but that EUR will close 2011 at higher levels than
it is currently trading at," said Camilla Sutton, chief
currency strategist at Scotia Capital in Toronto.
Spanish government bond yields fall, with the spread over
German Bunds narrowing to its tightest since mid-November,
while Portuguese bond spreads also came in.
(Additional reporting by Gertrude Chavez-Dreyfuss in New York,
Neal Armstrong and Anirban Nag in London, editing by W Simon),
