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Euro keeps gains as Dow scrambles higher

NEW YORK: Europe's single currency extended its New Year rally for a third straight session on Wednesday, still riding high on hopes of stronger economic growth in Europe and fears about Wall Street's health.

At the close of New York trading, the euro traded more than a full percent higher against the yen at 107.57 yen while standing up just a touch against the dollar at $1.0314.

Strong European purchasing managers data and turbulence on Wall Street had sparked a powerful rally on Monday that continued through Wednesday.

But the rally began to fizzle slightly as dealers booked profits shortly after the euro rose to a seven-week high at $1.04 overnight.

The euro's heady run higher and the Dow Jones industrial average's fledgling recovery of more than one percent may have helped dull the market's appetite for more euros, dealers said.

Blue chip stocks recovered while the technology sector was battered for a second straight day leaving the Dow Jones industrial average up 125 points at 11122.65 while the technology-heavy NASDAQ index was down about 25 points at 3877.54.

"There seems to be some New Year profit-taking on euro/yen, said Dennis Heidt, chief dealer at Banque Paribas. "Maybe some hedge funds are unwinding their positions from the previous year, comfortable that any Y2K problems are behind them."

European leaders, most notably Wim Duisenberg, the head of the 11-nation region's central bank however welcomed the one year old currency's gains and said more may be in store.

"So far, so good," Duisenberg told a news conference, forecasting further gains. The bank left interest rates unchanged at this week's meeting.

The euro was lifted overnight by news that Germany's December jobless total had dropped even though the unemployment rate ticked up slightly.

Traders were weary of driving the yen significantly higher, worried the Bank of Japan could again step into the market and sell its own currency to keep the appreciating yen from choking off economic recovery.

Fresh selling of yen helped the dollar reach its highest level against the yen since late November and boosted the euro as well.

"A lot of players have been long yen for a considerable period of time and have bailed out on stop-loss buying," Ben Strauss, vice president at Bank Julius Baer said.

But analysts said the dollar's climb would not likely go very far as the market turns its focus back to the fundamentals.

"The Bank of Japan's intervention caught the market a bit by surprise, but ... I believe any progress up toward (104-105 yen) will be met by heavy exporter selling," said John McCarthy, senior vice president at ING Barings Capital Markets. -Reuters