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* Greek debt talks could yield breakthrough
* Fitch downgrades five euro zone sovereigns
* USD/JPY drops on month-end exporter selling
NEW YORK (Frankfurt: A0DKRK - news) , Jan 27 (Reuters) - The euro surged to its highest level against the dollar in 6-1/2 weeks on Friday as optimism that Greece and its creditors will soon come to an agreement and avoid a messy default had investors scrambling to cover short positions in the single currency.
Data indicating a bumpy road ahead for the U.S. economy and a downgrade of five euro zone sovereigns by Fitch Ratings agency kept trading extremely choppy.
European officials voiced optimism on Friday that Greece could reach a deal with creditors to avoid a disorderly default. Greek Finance Minister Evangelos Venizelos told reporters that his country is just "one step away" from completing a debt-swap deal with its private creditors.
Greece plans to submit a final offer on a bond swap to its private creditors by Feb. 15, Finance Minister Evangelos Venizelos said on Friday.
"The euro is reacting to the Greek events," said Fabian Eliasson, vice president of currency sales at Mizuho Corporate Bank. "We came in, in the morning (in New York) and they were sort of expecting a deal, and they're back and forth."
The euro hit its highest level since Dec. 13, rising to $1.3220 before retreating a bit to last trade at $1.3208, up 0.8 percent on the day, according to Reuters data.
The euro briefly pared gains after Fitch Ratings downgraded the sovereign credit ratings for Belgium, Cyprus, Italy, Slovenia and Spain, indicating there is a 1-in-2 chance of further downgrades in the next two years.
Fitch's action was "not that much of a surprise," which is why the euro's pullback was not sustained, according to Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey,
"The euro's been bid all day and it still feels there's a short squeeze going on. Those who have tried to sell euro rallies have not had much joy. We might have put a top in for now, but we'll have to wait and see."
The European Union and International Monetary Fund want Greece to push through more budget cuts and implement austerity reforms before they agree on a new bailout, a report obtained by Reuters shows. and
U.S. data on gross domestic product showed the economy grew at its fastest pace in 1-1/2 years in the fourth quarter, but inventory rebuilding by businesses and slower business spending warned of weaker growth in early 2012.
"The devil is in the details," said Kathy Lien, director of currency research at GFT Forex in Jersey City, New Jersey. "Overall the details show far more weakness than the headline numbers."
Should a Greek deal come through, "I think the euro can perform a bit in the short end," Mizuho's Eliasson said. But once the immediate crisis passes, he added, "You're going to be faced with very, very low growth" in the region, pressuring the currency lower in the medium term.
Against the Swiss franc, the greenback seesawed after the GDP data. In afternoon New York trading, the U.S. dollar was down 0.8 percent at 0.9130 francs.
Against the yen, the euro fell 0.1 percent to 101.34 yen as the Japanese currency recovered broadly from lows struck this week.
The dollar last traded at 76.72 yen, 0.9 percent lower , leaving the yen on track for its biggest daily gain since late August.
The yen's strength was based on "normal ... end-of-month buying of the yen by Japanese exporters," according to a commentary published by veteran trader Dennis Gartman.
"They are usually 'in' at the month's end for this purpose, and they were a bit more aggressive than usual, given the yen's recent weakness," he added.
The dollar hit a two-month high of 78.28 yen on Wednesday, according to Reuters data, but the rally stalled right below resistance at its 200-day moving average. It reversed further after the U.S. Federal Reserve pledged to keep rates low for a prolonged period.
With interest-rate differentials moving in favor of the yen, the dollar was likely to stay subdued against the Japanese currency, said Ankita Dudani, G10 currency strategist at RBS (LSE: RBS.L - news) . (Additional reporting by Luciana Lopez in New York and Anirban Nag in London; Editing by Chizu Nomiyama)
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