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Euro hits six-week high on growth outlook optimism

[LONDON] The euro hit a six-week high against the US dollar on Friday, with investors optimistic about the strength of the euro zone's recovery after strong economic data this week.

The single currency is up around 0.6 per cent since Monday , putting it on course for a third straight week of gains against the US dollar, its best run since July.

The euro had started the week on the back foot, knocked by political uncertainty in Germany after coalition talks faltered, but it recovered quickly as investors focused on a robust growth outlook for Europe and as the dollar weakened broadly.

The US dollar dipped to a five-week low against a basket of currencies on Friday.

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"There's an underling medium-term trend here taking shape towards a weaker dollar," said BMO Capital Markets currency strategist Stephen Gallo, in London.

"When you have firm global risk appetite, pretty firm global growth conditions including in the euro zone, and firm global commodity prices, there isn't a lot of - if any - safe-haven demand for dollars," he said.

Mr Gallo added that developments in Germany, where the Social Democrats (SPD) appear close to dropping their opposition to renewing cooperation with Chancellor Angela Merkel, was giving some added support to the euro.

Minutes from the European Central Bank's latest policy meeting, released on Thursday, showed policymakers had broadly agreed on extending their quantitative easing (QE) scheme, albeit at a lower level, though a decision to keep the asset purchases open-ended appeared to generate fiercer debate.

"Without the ECB's recent commitment to maintain QE purchases until the end of September of next year, the euro would likely be trading at even stronger levels at the current juncture," said MUFG currency analyst Lee Hardman, in London.

"While there is still a risk that ongoing political developments could potentially trigger another knee jerk euro sell off in the coming weeks or months, any bouts of euro weakness should remain both temporary and limited," he added.

The euro reached as high as US$1.1875 in London trade, its strongest since Oct 13, having been given a boost by better-than-expected services and manufacturing industry surveys on Thursday.

The single currency also benefited from the US dollar's biggest one-day fall since June on Wednesday, after minutes from the US Federal Reserve's latest policy meeting showed some policymakers fretting over stubbornly weak inflation. That led some to question expectations of hikes in 2018.

The core personal consumption expenditures price index has consistently fallen short of the central bank's 2 per cent target for over five years, even as the Fed has moved toward normalising policy.