(Reuters) – The euro rose versus the dollar for the first time in four sessions on Tuesday, helped by profit-taking on bets favoring the U.S. currency and by expectations that German investor morale could nudge higher.
But the shared currency is unlikely to make large gains due to concerns the euro zone economy overall is still struggling.
That keeps alive the risk that the European Central Bank could cut its deposit rate, at which lenders park surplus funds at the central bank, to a negative rate from zero, making it unattractive to hold euros and hence keeping the currency under pressure, traders said.
German ZEW’s monthly poll of economic sentiment is forecast to rise to 38.3 in May from 36.3 while currency conditions are also expected to show some improvement.
A better-than-expected number could lift the euro to $1.3050 with stop-loss buy orders cited at $1.3055 while a disappointing number could push it down towards $1.2950, traders said.
The euro was up 0.2 percent at $1.3000, with traders citing buying by Middle East investors, helping it stay well above its recent five-week low of $1.2935. It gains pushed the dollar index .DXY away from a five-week high of 83.438 struck on Friday to trade at 83.109 on Tuesday.
“A positive ZEW survey will help the euro as it will indicate the worst is over,” said Marcus Hettinger, FX strategist at Credit Suisse.
“But a recovery will be slow and with expectations of negative rates hanging, there are risks to the downside. Overall we expect a range of $1.27-$1.33 in coming weeks.”
Traders said a Financial Times report that U.S. hedge funds were turning bullish about euro zone assets was also helping sentiment towards the single currency.
The dollar was down 0.4 percent at 101.40 yen, having pulled back from a 4 1/2-year high of 102.15 yen set on Monday.
Traders said the yen-selling spree was on pause due to a spike in Japanese government bond yields, which reduces the relative attraction of foreign bonds for Japanese investors.
But the dollar was underpinned by data showing U.S. retail sales unexpectedly rose in April.
“Dollar/yen may be consolidating around 100-102.50 yen for now. But if upcoming U.S. economic data is strong, the dollar could pick up momentum,” said UBS’s Hiroshi Maeba in Tokyo.
There is a raft of U.S. data this week including Wednesday’s industrial production, housing starts and consumer prices on Thursday and consumer sentiment data on Friday.
The rise in core retail sales, in the wake of strong job growth in the last three months, strengthened the view the U.S. Fed could scale back its asset-buying program later this year.
(Additional reporting by Hideyuki Sano in TOKYO; Editing by Hugh Lawson)