Euro, riskier FX buoyed by Aussie data

The euro hit a two-month high against the dollar on Thursday after strong Australian jobs data boosted higher-risk currencies, while investors awaited European Central Bank comments on bank stress tests and money markets.

A jump in Australian employment in June drove the Australian dollar up more than 1 per cent on the day against the dollar and nearly 2 per cent higher against the yen.

The European Central Bank is expected to keep interest rates at a record low 1.0 per cent when it announces its policy decision at 1145 GMT. Markets will focus on comments by ECB President Jean-Claude Trichet on whether stress tests on European banks will be tough enough to convince markets of their worth.

Investors will also watch for clues to whether the ECB is happy with a recent rise in money market rates or may seek to increase liquidity, possibly via tenders with longer maturities.

"The euro is on a reasonably good uptrend. If Trichet sounds a bit more optimistic today on money markets and bank stress tests we will see that uptrend continue," Daragh Maher, deputy head of foreign exchange research at Credit Agricole, said.

"Markets seem comfortable we will get reasonably testing assumptions in the tests but Trichet will avoid addressing the issue directly. He will say wait for the results."

Trichet is due to hold a news conference at 1230 GMT.

The single currency climbed as high as $1.2688 in Asian trade, its highest since mid-May, before trimming gains. It was trading 0.2 per cent up at $1.2659 at 0907 GMT and some market participants said options set to expire later in the day at $1.2650 and $1.2655 may chain the euro near current levels.

The euro has rallied on short-covering in the past month, after hitting a four-year low of $1.1876 in early June.

Analysts said resistance at its May 21 high of $1.2673 was proving hard to break cleanly and further resistance at $1.2767-80 was seen as difficult to overcome on this run higher.

The $1.2767-80 band is where downtrend resistance emerges as a line connecting the December 2009 and April 14 highs. It is also a 50 per cent retracement of the euro's decline from a mid-April high to the June low.

The yen was one of the day's biggest losers in what some said was a largely technical rebound in riskier trades, while the euro's gains quickly ran into profit-taking.

Sterling hit a two-month high versus the dollar of $1.5241 as easing concerns about euro zone banks and global recovery boosted risk demand.

It later erased those gains and was trading down 0.22 per cent at $1.5149 at 0908 GMT, with market players citing Asian central bank selling behind the downward move.

Markets awaited the Bank of England's monetary policy decision at 1100 GMT, though most economists expect the bank to leave interest rates at 0.5 per cent.

The Aussie was 1.7 per cent higher versus the yen at 77.09 yen, after hitting 77.23 yen, its highest in more than a week, on the back of data showing Australia created 45,900 jobs in June, much higher than forecasts for 17,500.

The Aussie rose 1.0 per cent on the day against the dollar to $0.8732, touching its highest in almost two weeks at $0.8748 and pushing above its 55-day moving average at $0.8664.

The low-yielding yen has benefited recently as investor confidence took a knock, but it fell sharply against the euro, dollar and kiwi on Thursday. A 0.7 per cent rise in European shares underpinned improved risk demand.

Against a basket of six major currencies, the dollar hit a fresh two-month low of 83.707 before recovering to 83.90.