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Foreign Exchange

Euro gains alongside AUD and NZD on short covering, stronger equities

The euro rose against the US dollar early on Thursday, tracking gains in Australian and New Zealand dollars after Asian equities posted their biggest rise in five weeks and investors closed out short positions accumulated over recent weeks.

The Australian dollar rose from a six-week low against the US dollar amid speculation that policymakers would hold back from any action to prevent the currency appreciating, analysts said. Commodities rallied, with oil hitting a two-week high and copper rising for a third day.

“We have seen lots of Aussie and New Zealand dollar buying – the bet is that both countries are happy enough to live with currency strength,” said Gareth Berry, an FX strategist at UBS in Singapore. “The euro has had a better time of it as well.”

Demand for the Aussie was boosted after Reserve Bank of Australia deputy governor Ric Battellino said the strength of the currency reflected demand for the nation’s natural resources in a “very strong” global economy.

Traders increased their bets on the scale of Reserve Bank of Australia rate hikes, a Credit Suisse Group AG index showed, with the bank expected to lift its key lending rate by 25 basis points over the next 12 months, up from a forecast of 22bp yesterday.

The Australian dollar traded as high as $1.0604 in Asia trading, compared with $1.0508 earlier in the session, while the New Zealand dollar advanced to 81.13 cents, from 79.67 cents.

Both currencies were boosted by speculation that China's sovereign wealth fund, the China Investment Corporation, might have set aside up to 1.5% of its foreign exchange reserves to invest in New Zealand assets, and 2% to invest in Australia. China has in recent months looked to shift some of its more than US$3 trillion in foreign exchange reserves away from US dollar assets.

The euro was bolstered by the China diversification story after the Financial Times reported European Financial Stability Facility chief executive Klaus Regling as saying that Asian investors, including China, might buy Portuguese bailout bonds when the EFSF begins selling in June.

The euro rose to $1.4169 on Thursday from as low as $1.4080 earlier in the session, paring declines on Monday when it fell to the lowest level for more than nine weeks.

“Some of the move is short covering as this the first day for a while that we haven’t had any negative news about Greece,” said a strategist in Singapore.

Later today investors will look to French reports of consumer confidence, and reports of revised US first-quarter growth figures and initial jobless claims, for clues on prospects of a further euro rally.

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