The euro hit an a 11-month high against the dollar and a 21-month peak against the yen on Friday, as investors bet on an economic upturn in Germany and signs of a stabler euro area banking system.
Sentiment towards euro zone assets has picked up in recent weeks and investors have positioned for European banks to repay part of the ultra-cheap three-year loans the European Central Bank extended in late 2011 and early 2012.
A willingness to hand back the loans would considered a sign that the struggling banking system is on the mend, analysts said.
The ECB will announce at 1100 GMT how much of the 1 trillion euros it lent out banks intend to pay back next week, with repayments of about 100 billion euros forecast.
That would lead to some shrinking of the ECB’s balance sheet at a time when the Federal Reserve and the Bank of Japan are still expanding theirs. Balance sheet expansion by a central bank usually hurts a currency as it increases its supply.
If the influential German Ifo survey due at 0900 GMT surprises on the positive side like the country’s ZEW survey and Purchasing Managers Index did earlier this week, the euro could push higher, traders said. The Ifo is forecast to show some improvement in business conditions.
The euro was up 0.3 percent at $1.3410, having hit a 11-month high of $1.3420 with offers cited above $1.3430. Against the yen, the euro was 0.5 percent higher at 121.48 yen – its highest in 21 months.
“We are bullish about the euro and expect it to rise past $1.35 in the coming weeks,” said George Saravelos, G10 FX strategist at Deutsche Bank.
“There is an upside risk to the Ifo numbers given the good PMI survey we had out of Germany. Also while the pre-payment to the ECB will be spread out, we think it is supportive for the euro because the ECB’s balance sheet will be shrinking while the Fed and the BoJ are expanding theirs.”
YEN UNDER PRESSURE
The dollar was up 0.3 percent at 90.60, having hit a 2-1/2 year high of 90.695 during the Asian session with an option barrier cited at 90.75 yen. The U.S. currency has gained more than 14 percent since mid-November.
The yen came under renewed pressure after reports on Thursday quoted Japan’s deputy economy minister, Yasutoshi Nishimura, as saying the yen’s decline is not over, and that a dollar/yen level of 100 would not be a concern.
“Every time dollar/yen has a correction, it seems that one or other Japanese official comes out and talks the (Japanese) currency down,” said Callum Henderson, global head of FX research for Standard Chartered Bank in Singapore.
“Undoubtedly, there is a campaign on the part of the Japanese authorities to continue to focus the market’s attention on the need to reflate the economy.”
The yen had bounced after the Bank of Japan on Tuesday doubled its inflation target to 2 percent and made an open-ended commitment to buying assets from next year.
Although it was the BOJ’s boldest policy attempt yet to end years of economic stagnation, the action was deemed a disappointment by some due to the lack of an immediate expansion of asset purchases.
The yen’s precipitous descent since late last year and Tokyo’s efforts to drive the currency lower to achieve growth has raised eyebrows abroad, with German Chancellor Angela Merkel singling out Japan on Thursday as a source of concern.
Japanese Finance Minister Taro Aso, shrugging off the unease, said on Friday that the BOJ’s monetary easing was aimed at pulling the country out of deflation, not manipulating currencies.