The euro gained against the dollar o n Monday in a mostly technical rebound from a two-year
low touched earlier in the session even as the single currency
faces more headwinds from global growth concerns and the
region's ongoing debt crisis.
Euro zone finance chiefs were meeting to flesh out plans to
reinforce their common currency, but investors are cautious the
talks in Brussels may do little more than highlight the
limitations of last month's deal to help indebted states and
Diminished summit hopes also weighed on Spanish and Italian
bonds, with yields moving back up to unsustainable levels.
One bright spot came as European Central Bank President
Mario Draghi kept the door open to further interest rate cuts,
saying the bank would make any decision on further action based
on economic data. But investors cautioned it would not be enough
to sustain gains.
While lower rates typically reduce demand for a currency,
with the euro zone struggling to maintain economic growth, any
signs of action to stimulate the economy will be taken as
positive by investors.
For now though, investors were narrowly focused on the euro
having fallen too far, too fast. As it regained some temporary
footing, other investors who had bet against the euro were
forced to buy to reduce losses, giving it more strength.
"There's a significant amount of traders short euro and
therefore it is not particularly unusual to see unexplained
bursts of short-covering," said Kathy Lien, managing director of
FX strategy at BK Asset Management.
Currency speculators decreased their bets in favor of the
U.S. dollar in the latest week, according to data from the
Commodity Futures Trading Commission released on Monday.
The euro was last up 0.2 percent against the dollar
at $1.2314 after climbing as high as $1.2324 and well off a low
of $1.2255 hit in early trade.
The dollar was last down 0.1 percent at 79.58 yen,
moving away from a two-week high hit on Thursday, according to
Pressure for action by European leaders is growing, but
there are nagging concerns that decisions on issues such as
banking supervision, how to use Europe's rescue money, aid to
Spain and Cyprus, and whether to grant concessions to Greece may
take months to finalize.
"The market's overall cautious mood and a rise in Spanish
and Italian bond yields are weighing on the euro, although
reports that Spain's budget targets may be relaxed is perhaps
providing a partial offset," said Nick Bennenbroek, head of
currency strategy at Wells Fargo in New York.
"For the week ahead we expect some consolidation in FX
markets, with an overall neutral directional view on the U.S.
dollar and other currencies," he said.
Strategists said further rises in Spanish and Italian bond
yields could push the euro down further, potentially bringing
the 2010 low into view.
European ministers were set to grant Spain an extra year to
reach its deficit targets in exchange for further budget savings
but remained far from pinning down details of bank rescues and
emergency bond-buying that are of greater concern to markets.