By Vicki Schmelzer

NEW YORK (MNI) - The euro posted a new 12-week high over $1.3100 Thursday, driven largely by ever-shifting views about the eurozone and U.S. economies as well as likely month-end repositioning.

The euro has risen over 10% in the past six weeks, from the June 7 lows near $1.1875 to the $1.3107 highs posted earlier.

Back in early June, when the euro was trying to pick itself off of the floor, there was no reason to think that the pair was not headed toward $1.15, $1.10 or even parity versus the dollar.

Eurozone peripheral spreads were widening and there were too many unknowns about peripheral debt to quantify.

As the summer wore on, a string of upbeat eurozone data, juxtaposed against a string of weak U.S. data, helped shift the market's focus.

The double whammy of a weak U.S. data and an unexpectedly strong eurozone data, as well as hopes about the European stress test results, led to the first wave of euro short covering, which sent the euro rising towards $1.2500.

The second wave of euro buying came as the market pushed initial Federal Reserve tightening from Q1 2011 to Q3 2011, with some forecasts for the initial rate hike to come only in Q1 2012.

The euro continued its ascent, with the pair gradually testing current levels over $1.3000.

Naysayers have been present along the way, and then as now, they argue that the latest euro rally should be short lived, with the pair soon to see a renewed wave of selling.

Recently however, analysts have made the case that there is scope for the euro to keep pressing higher in the short term.

"Buoyant macro growth numbers and a strong earnings season has allowed investors to look at European equities again," said Geoffrey Yu, strategist at UBS.

UBS attributed the euro rally from $1.20 to $1.30 as a "positioning squeeze," but now it is likely that long-term funds have also been riding the rally.

"These flows are important due to their structural nature, as they will not be liquidated unless there is a material pick-up in sovereign risk," Yu said.

"If sustainable, the euro will be hard to sell in the short to medium term," he said.

UBS's global equity strategy team has upgraded their Europe and UK allocation to neutral from underweight and have downgraded their U.S. allocation to neutral from overweight.

A month or so ago, the market was also concerned about the hefty refunding that would take place in June (E215 billion) and July (E275 billion).

The thought at the time was, if only the eurozone can get through these months unscathed, the euro may begin to perform better.

Now however, with the U.S. economy on less solid ground, there is less certainty about the euro's ability to shine.

"The heaviest month for redemptions has passed, the stress test results are re-opening the primary market for banks in the periphery and European growth is outperforming the US," said John Normand, global head of currency strategy at JP Morgan.

"Normally that mix would drive EUR USD much higher, but in an environment where stocks are slipping because the U.S. is slowing, the euro will probably peak around $1.32," he said.

After a brief push higher, the euro "should range around $1.25 for the next few months," Normand said.

Eurozone data out earlier continued the promising trend of recent weeks.

Economic morale in the euro zone surprised on the upside again in July, with gains across all sectors, the European Commission said Thursday.

After a largely unexpected 0.6-point upturn in June, the Commission's sentiment indicator jumped 2.3 points in July to 101.3, the highest level since March 2008.

The good news follows a series of upbeat indicators that show activity gaining momentum at the start of 3Q, suggesting that the slowdown widely expected, as stimulus measures begin to unwind, may be later or even milder than feared.

Most analysts had expected at best a modest improvement in sentiment, given the lingering tensions from the sovereign debt crisis and the intensification of austerity programs in many Eurozone countries.

Also, the EC announced earlier that the eurozone's business climate indicator jumped to +0.66 in July, its highest level since March 2008, while June's figure was revised upward to +0.4.

The better-than-expected eurozone data, which has served to support the euro versus the dollar and sterling recently, may not be sustained, said Dan Katzive, senior currency strategist at Credit Suisse.

"The euro may move higher, but should come back down as European data goes through the same moderation as the U.S. did," he said.

Credit Suisse has a three-month target of $1.3000 in the euro, Katzive said.

The euro was trading at $1.3077 Thursday afternoon, after trading in a $1.2979 to $1.3107 range.

The break earlier above $1.3095, the May 10 high (the day the joint EU/IMF bank stabilization plan was announced), was deemed bullish.

Nevertheless, the market wanted further confirmation of a new euro uptrend and preferred to also see a close above $1.3125, the 38.2% Fibonacci retracement of the November-June decline, traders said.

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[TOPICS: M$$FX$,M$U$$$,M$X$$$]