Euro at two-month high on upbeat sentiment

The euro hit a two-month high versus the dollar and held firm against other major currencies on Monday thanks to strong German business confidence and reduced anxiety about political instability in Europe’s biggest economy.

The euro fetched $1.1944, little changed from late US levels last week after having hit a high of $1.1946, its highest level in two months.

The common currency now faces a test at $1.1965. That level is the 76.4 percent retracement of its decline from a two-and-a-half-year peak of $1.2092 touched on September 8 to a three-and-a-half-month low of $1.1553 set on November 7. It has gained 3.2 percent since that low.

The euro also rose to 133.24 yen, its highest level since November 16, and firmed against the British pound to 0.8978 pound, edging near this month’s peak of 0.9014.

The German business confidence index compiled by the Ifo Institute for Economic Research hit a record high in November, another sign of strong growth in the euro zone’s largest economy.

The upbeat data was followed by positive political developments after German Chancellor Angela Merkel – whose chances for a fourth term were plunged into doubt a week ago when threeway coalition talks with the pro-business Free Democrats and Greens collapsed – was handed a political lifeline by the Social Democrats.

In contrast, the dollar lacked momentum of its own as persistently low inflation is seen to be undermining the case for the Fed’s rate hikes.