Forex Market Review – Euro retains gains ahead of IMF talks, boosted by Fitch comments

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Euro climbed steadily to its highest level in a week against the US dollar. The single currency was first boosted after Fitch ratings agency comments that sparked buying. Fitch said they are unlikely to downgrade France in 2012 unless there is a serious intensification of the euro-zone crisis. Meanwhile, the single currency was given a further lift ahead of IMF talks between Germany Chancellor Angela Merkel and IMF head Christine Lagarde, giving some otimism to investors that officials are taking steps to dampen the debt crisis.  On Monday Merkel met with French President Nicolas Sarkozy to discuss tighter fiscal integration in Europe. EURUSD edged up to to a 1.2817 high versus the Monday low of 1.2665.

The French 10-year yield fell four basis points to 3.28 percent. The extra yield that investors demand to hold the securities instead of German bunds narrowed seven basis points to 140 basis points. The Italian-German 10-year yield spread tightened five basis points to 527 basis points and the Spanish yield gap to bunds shrank six basis points, to 366 basis points.

The improved risk sentiment in markets resulted in the US dollar and yen to weaken against higher-yielding currencies. The ICE Dollar Index, used to track the dollar against the currencies of six major U.S. trading partners, fell 0.1 percent to 80.89 after rising to 81.503 yesterday, the highest since September 2010.

The British pound held firm against the dollar, trading a high of 1.5499 in the European session.

Risk currencies like the Australian dollar extended gains to 1.0347 against the USD during European trading versus the Asian session open of  1.0238, aided by better than expected Australian construction data. The Canadian dollar strengthened as well against the greenback, boosted by Canadian housing starts beating expectations at 200,000 in December versus 185,000 forecast. USDCAD fell to 1.0161 from the European open of 1.0189.

EURJPY hit a high of 98.46 from 98.19 while USDJPY has been trading a 76.79-76.90 range since Monday.

The Swiss franc gave up some gains against the euro from Monday when the franc jumped to a three month high after the resignation of SNB chief Phillipe Hildebrand. EURCHF rebounded from 1.2104 to 1.2140.