The euro rallied to a two-week peak of $1.03 yesterday on new evidence of the strength of German economic recovery but then fell back as traders took profits.
The single currency closed at $1.0220 from $1.0257 on Monday having traded as high as $1.03. Against sterling it closed at 62.89p from 63.12p and as a result the pound closed at 79.85p from 80.17p.
A four times larger than expected fall of 29,000 in Germany's unemployment figures in November initially pushed the euro higher after its large gains of the day before.
However, large sell orders from traders keen to lock in some profits saw it quickly retreat to just below the closing level of the previous day.
The euro is expected to remain very volatile as the turn of the millennium draws closer, but more sustainable gains in the currency could be seen early next year if the 11-nation euro zone continues to release strong economic reports, analysts say.
Hopes the euro would find favour with longer-term players were also boosted after the Hong Kong Monetary Authority said it would increase the weighting of the euro in its foreign currency reserves to 10 per cent from 15 per cent, moving from an underweight to a neutral stance.
According to Mr Colin Hunt, chief economist at Goodbody Stockbrokers, the Hong Kong authority is one of the most important currency reserve holders in the world. "Its decision to increase levels in euro is regarded in markets as a signal that it believes the euro is oversold and as a vote of confidence in long-term prospects of the currency."
Other data showed that German GDP grew 0.7 per cent in the third quarter from the second quarter and was up 1.2 per cent year-on-year, confirming that Europe's largest economy is gaining pace. At the same time, seasonally adjusted unemployment fell 29,000 in November from the previous month to 4.081 million people.
According to Mr Hunt, the figures mean there should be a gradual improvement in the labour market which will reduce political pressure on the German chancellor, Mr Gerhard Schroder. If this is the case, it is likely to lead to gains for the euro as the currency markets are currently focused on his relative political weakness.
