Currencies: Euro turns up from 2-year low on short squeeze

NEW YORK (MarketWatch) � The euro turned up sharply against the dollar on Friday, which analysts attributed to a big shift in traders betting against the currency after it touched technical levels near the lowest in two years.

Earlier, the U.S. dollar gained ground after a report showed U.S. wholesale prices unexpectedly rose last month, frustrating hopes that central bankers will ease policy further.

Still, the euro remained near a two-year low after Moody�s Investors Service cut Italy�s government bond ratings by two notches and the country sold new three-year bonds.

Click to Play China growth rates slows

The latest Chinese GDP data show that growth has decelerated to its slowest pace since the global financial crisis.

The euro EURUSD �fell as low as $1.2156, before rebounding to $1.2245, up from $1.2197 in North American trade late Thursday.

For the week, it�s still down 0.4%, having fallen for the past seven sessions, according to FactSet.

The dollar index DXY , which measures the greenback�s performance against a basket of major currencies, turned down to 83.324, from 83.666 Thursday. The move in the euro erased the index�s gain for the week, which was already weighed by a decline versus the Japanese yen.

Traders who are short the euro sometimes have to reverse those bets as certain levels are hit, analysts said.

Wednesday�It looks to be a technically driven move,� said Eric Viloria, senior currency strategist at Forex.com. European bonds are performing better, �equities are higher, and U.S. yields are higher, which all correlates to a higher euro-dollar.� Read story on U.S. yields.

The Dow Jones Industrial Average DJIA �jumped 1.6%, after falling for the prior six sessions � its longest losing streak since May.

Analysts also noted that Goldman Sachs analysts, led by Thomas Stolper, said in a note Friday that they were sticking with their 12-month forecast for the euro to rise to $1.40 � quite a far cry from the $1.20 or so that many others see being reached over a much shorter horizon.

Even Goldman itself lowered its three-month forecast to $1.25, from $1.33 previously, according to Dow Jones Newswires.

Reuters

Goldman saying the euro�s 12-month forecast was part of what triggered the euro�s gains, said Dean Popplewell, chief currency strategist at trading platform Oanda.

Earlier, the dollar rose after the U.S. Labor Department said its Producer Price Index rose 0.1% in June, while analysts had expected a decline of as much as 0.5%. Excluding food and energy, prices rose 0.2%, in line with forecasts. Read about PPI.

In recent days, the dollar has gained ground as hopes [by investors in riskier assets like stocks and commodities] have faded that the Federal Reserve may launch a third round of quantitative easing. That kind of policy typically involves buying assets to pump money into the financial system, and is seen by many as devaluing a currency.

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�The uptick in inflation dampens the Fed�s scope to push through QE3,� said David Song, a currency analyst at DailyFX.

Also, Moody�s cut Italy�s bond rating, but the country still managed to sell 3 billion euros in debt in a closely-watched auction. Read more on Italy.

Chinese GDP

In Asian trading hours, the U.S. dollar edged lower after Chinese economic data matched expectations, easing concerns of an overly-rapid slowdown in the world�s second-biggest economy.

Chinese data showed the nation�s economy expanded 7.6% in the second quarter -- still a sharp slowdown from the 8.1% growth in the first quarter. Read story on China GDP.

Among other major currency pairs, the dollar USDJPY �slipped to buy 79.29 yen, from �79.33 late Thursday. The greenback has declined 0.7% this week versus its Japanese counterpart.

The British pound GBPUSD �extended gains to $1.5578, up from $1.5429 Thursday. It�s gained 0.6% from last Friday.

The Australian dollar AUDUSD �climbed to $1.0227 from $1.0138 in the prior session, up 0.1% from the levels seen a week ago.