Euro set for biggest weekly gain in four months

By Tom Finn

LONDON (Reuters) - The euro on Friday was headed for its biggest weekly rise in over four months with the dollar weakening on cautious signals from the Federal Reserve about further rate hikes.

The euro has been stuck in a $1.12-$1.15 range for the last three months due to growth fears and signs the European Central Bank is unlikely to end its stimulus soon.

But dovish Fed minutes this week have triggered dollar selling allowing the euro surge to as high as $1.1581 and propelling it past a 100-day moving average for the first time in three months.

"The euro remains supported by the soft dollar story. The risk of a short squeeze perhaps to the $1.1620/ area remains," said Chris Turner, head of foreign exchange at ING in London.

He added, though, that a soft macro outlook suggests "Europe will struggle to attract rotational flows out of U.S. markets."

Despite its recent gains the single currency has been pressured by a slew of weaker-than-expected economic data, especially from France and Germany.

The European Central Bank is widely expected to remain accommodative in 2019, which traders say should prevent the currency from breaking much higher.

Another possible reason for euro strength is a resurgence this week in the offshore Chinese yuan, said Kit Juckes, a currencies strategist at Societe Generale (PA:SOGN).

"A stronger yuan means that 23.6 percent of the euro's trade-weighted basket is going up, and that means that even a currency weighed down by domestic economic and political woes can get a little lift against the dollar," he said.

The yuan has breached the key 6.8 per dollar level in both onshore and offshore trade.

China and the United States have extended trade talks in Beijing, boosting oil prices and broader sentiment.

That has lifted the yuan to its highest level since late July along with recent assurances from Beijing of further fiscal boosts to the slowing economy.

U.S. Treasury Secretary Steven Mnuchin said late on Thursday that Chinese Vice Premier Liu He will "most likely" visit Washington later in January for trade talks.

Currencies such as the Australian dollar , a gauge of risk appetite, and the New Zealand dollar , are likely to see further gains if a U.S.-Sino trade deal is reached, said Sim Moh Siong, currency strategist at Bank of Singapore.

The dollar index (DXY) on Friday fell by 0.2 percent to 95.32. The index has fallen around 2.2 percent since mid-December on expectations that a slowdown in growth, both in the United States as well as globally, will restrict the Fed from raising rates in 2019.

Markets are now pricing in no further rate hikes by the Fed this year.

In 2018, the greenback outperformed its peers, gaining 4.3 percent as the Fed hiked rates four times on the back of a strong domestic economy.

Elsewhere, sterling traded marginally weaker, fetching $1.2737 with traders focused on the progress of Brexit.

British Prime Minister Theresa May must win a vote in parliament to get her Brexit deal approved or risk seeing Britain's exit from the European Union descend into chaos. The vote is now due to take place on Jan. 15.