Dollar slips, euro rises on LTRO hopes

NEW YORK (MarketWatch) � The euro rose to its highest level against the U.S. dollar in about three months on Friday as investors eyed next week�s long-term liquidity operation by the European Central Bank as a cue to bet on riskier assets.

�Liquidity combined with a willingness to turn a blind-eye to Greek problems is helping fuel this rally not only in stocks but in peripheral bond yields and also in the euro,� said Kathleen Brooks, research director at Forex.com.

The ICE dollar index DXY , which measures the greenback against a basket of six currencies, fell to 78.341 compared with 78.677 in late North American trading on Thursday.

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The euro EURUSD rose to $1.3462 from $1.3367 Thursday. The shared currency hasn�t closed above $1.34 since early December.

The euro also jumped 1.9% against the Japanese yen EURJPY �to buy �108.97 -- its strongest since late October.

The ECB�s second three-year long-term refinancing operation, known as an LTRO, is scheduled for Feb. 29.

�The market continues to view recovery hopes as remaining on track, this as the Greek issue has been parked on the sidelines. In that context having breached the $1.34 threshold for the first time since early December, we could continue to see euro short-covering taking us towards $1.3509 into month end,� said Jeremy Stretch, currency strategist at CIBC in London.

More than 500 banks took 489 billion euros in three-year loans at the ECB�s first three-year LTRO in December. The flood of liquidity has been credited with easing worries over the prospect of a cataclysmic funding crunch in the euro zone, reigniting risk appetite and boosting overall asset prices. Read blog on expectations for LTRO.

That said, uncertainty over Greece could re-emerge to undercut the shared currency, Stretch and other strategists said.

�Over the near term, upcoming votes in various countries on the second Greek bailout deal will provoke some nervousness while Greek reform implementation risks will also act to dampen euro sentiment,� wrote strategists at Credit Agricole. Read more on Greece and its debt swap.

For the week, the euro is up 2.4%, its biggest weekly gain since October.

The dollar index has slipped 1.2%, its first decline in four weeks.

Dollar highest since July vs. yen

Against the Japanese yen, the dollar hit its strongest level since July, topping levels not seen since before Japanese official last felt the need to intervene to weaken their currency.

The dollar USDJPY rose to buy 80.97 yen, from �80.02. So far in February, it�s jumped about 6.1% � the fastest monthly gain since December 2009.

�With the Bank of Japan showing preemptive action to curb the yen�s advance, it appears a major bottom has been put in place around the 76 [yen] exchange rate,� said Christopher Vecchio, a currency analyst at DailyFX.

The dollar could rise to 90 yen by year-end, he said, �though considering the deteriorating fundamentals of the Japanese economy, our target could be revised higher to 95 yen in the coming months.�

The British pound GBPUSD �traded at $1.5889, up from $1.5734 on Thursday.