* Media reports of progress in Greek debt talks boost euro
* Dollar struggles after dovish Fed fuels risk appetite
* Ultra low U.S. rates expected until late 2014
By Nia Williams
LONDON, Jan 26 (Reuters) - The euro hit a five-week high against a broadly weak dollar on Thursday on speculation of progress in Greek debt negotiations and after the U.S. Federal Reserve indicated interest rates would stay at ultra low levels for at least another two years.
Traders said the euro was boosted by media reports that Greece's private creditors are willing to improve their "final offer" of a 4 percent interest rate on new Greek bonds in order to clinch a deal in time to avert a messy default.
The new offer was reported by Greek media, without quoting any sources, and analysts said the euro was still vulnerable to any negative headlines on the talks that could prompt investors to buy back the safe haven greenback.
The single currency hit a session peak of $1.3175, its highest level since Dec. 21, and was last trading up 0.4 percent on the day at $1.3162. It had rallied from around $1.2980 before the Fed statement on Wednesday, with macro funds cited as heavy dollar sellers.
The euro also rose to a fresh one-month high of 102.16 yen , well above an 11-year low of 97.04 yen touched on Jan. 16.
"There's a story in a couple of Greek papers suggesting private creditors might make a lower offer and I think that has helped the euro in the last hour," said George Saravelos, G10 FX strategist at Deutsche Bank.
"But the focus is more on the broader low volatility environment and the fact the Fed was dovish. It would clearly be helpful if we had a result (on Greece) but focus is on the Fed. I think the dollar will stay under pressure for a few days."
Higher-yielding commodity currencies also outperformed as the prospect of continued easy U.S. monetary policy supported investor appetite to take on risk.
The Australian dollar hit a three-month high of US$1.0688, while the New Zealand dollar traded at US$0.8232, its highest level since Oct. 28.
Federal Reserve Chairman Ben Bernanke said the U.S. central bank might consider further monetary easing through bond purchases. Policymakers also pushed back the likely timing of an eventual interest rate hike until late 2014, 18 months later than previously suggested.
The dollar gave back some of its recent gains against the yen, slipping to 77.55 following its rise to a two-month high of 78.28 yen on trading platform EBS on Wednesday. Strong technical resistance was cited around 78.30 yen, with the 200-day moving average now at 78.33 yen.
The greenback also dropped versus the Swiss franc to 0.9163 francs on trading platform EBS, its lowest level since early December.
GREEK UNCERTAINTY
Risk appetite was further supported by Italy selling the top planned amount of 5 billion euros of zero-coupon and inflation-linked bonds. The auction saw sound demand ahead of a crucial sale of five- and 10-year paper on Monday.
Some analysts said although the dollar was likely remain soft against perceived riskier currencies, investors would be wary of pushing the euro too high given concerns about the region's debt crisis.
"The main surprise was they (the Federal Reserve) were unequivocally dovish in their statement which suggested they do not need data to deteriorate to justify easing monetary policy further," said Michael Sneyd, FX strategist at BNP Paribas.
"We think this risk rally will last a bit longer, particularly in the commodity currencies. Against the euro there is still the overhang that we do not have any resolution to a Greek PSI agreement, euro/dollar is probably going to top out."
With time slipping ahead of a March deadline when Greece faces major bond redemptions, the top negotiator for private creditors, Charles Dallara, returns to Athens on Thursday to resume talks with officials, both sides said.
While the single currency's climb has led many investors to cut back what had been significant short positions, some of these positions remain, leaving it open to short covering rallies despite concerns about Europe's debt situation.
Still, many analysts said the overall outlook for the euro was shaky. Morgan Stanley strategists said in a note that any corrective rebound into the $1.3230 area in coming days should be used as an opportunity to re-establish bearish strategies.
* Dollar struggles after dovish Fed fuels risk appetite
* Ultra low U.S. rates expected until late 2014
By Nia Williams
LONDON, Jan 26 (Reuters) - The euro hit a five-week high against a broadly weak dollar on Thursday on speculation of progress in Greek debt negotiations and after the U.S. Federal Reserve indicated interest rates would stay at ultra low levels for at least another two years.
Traders said the euro was boosted by media reports that Greece's private creditors are willing to improve their "final offer" of a 4 percent interest rate on new Greek bonds in order to clinch a deal in time to avert a messy default.
The new offer was reported by Greek media, without quoting any sources, and analysts said the euro was still vulnerable to any negative headlines on the talks that could prompt investors to buy back the safe haven greenback.
The single currency hit a session peak of $1.3175, its highest level since Dec. 21, and was last trading up 0.4 percent on the day at $1.3162. It had rallied from around $1.2980 before the Fed statement on Wednesday, with macro funds cited as heavy dollar sellers.
The euro also rose to a fresh one-month high of 102.16 yen , well above an 11-year low of 97.04 yen touched on Jan. 16.
"There's a story in a couple of Greek papers suggesting private creditors might make a lower offer and I think that has helped the euro in the last hour," said George Saravelos, G10 FX strategist at Deutsche Bank.
"But the focus is more on the broader low volatility environment and the fact the Fed was dovish. It would clearly be helpful if we had a result (on Greece) but focus is on the Fed. I think the dollar will stay under pressure for a few days."
Higher-yielding commodity currencies also outperformed as the prospect of continued easy U.S. monetary policy supported investor appetite to take on risk.
The Australian dollar hit a three-month high of US$1.0688, while the New Zealand dollar traded at US$0.8232, its highest level since Oct. 28.
Federal Reserve Chairman Ben Bernanke said the U.S. central bank might consider further monetary easing through bond purchases. Policymakers also pushed back the likely timing of an eventual interest rate hike until late 2014, 18 months later than previously suggested.
The dollar gave back some of its recent gains against the yen, slipping to 77.55 following its rise to a two-month high of 78.28 yen on trading platform EBS on Wednesday. Strong technical resistance was cited around 78.30 yen, with the 200-day moving average now at 78.33 yen.
The greenback also dropped versus the Swiss franc to 0.9163 francs on trading platform EBS, its lowest level since early December.
GREEK UNCERTAINTY
Risk appetite was further supported by Italy selling the top planned amount of 5 billion euros of zero-coupon and inflation-linked bonds. The auction saw sound demand ahead of a crucial sale of five- and 10-year paper on Monday.
Some analysts said although the dollar was likely remain soft against perceived riskier currencies, investors would be wary of pushing the euro too high given concerns about the region's debt crisis.
"The main surprise was they (the Federal Reserve) were unequivocally dovish in their statement which suggested they do not need data to deteriorate to justify easing monetary policy further," said Michael Sneyd, FX strategist at BNP Paribas.
"We think this risk rally will last a bit longer, particularly in the commodity currencies. Against the euro there is still the overhang that we do not have any resolution to a Greek PSI agreement, euro/dollar is probably going to top out."
With time slipping ahead of a March deadline when Greece faces major bond redemptions, the top negotiator for private creditors, Charles Dallara, returns to Athens on Thursday to resume talks with officials, both sides said.
While the single currency's climb has led many investors to cut back what had been significant short positions, some of these positions remain, leaving it open to short covering rallies despite concerns about Europe's debt situation.
Still, many analysts said the overall outlook for the euro was shaky. Morgan Stanley strategists said in a note that any corrective rebound into the $1.3230 area in coming days should be used as an opportunity to re-establish bearish strategies.
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