NEW YORK: The euro on Monday leaped to its highest level against the dollar in nearly two weeks, buoyed by appetite for risk on optimism that Greece will receive more funding and signs of progress on resolving a looming US fiscal crisis.
The common currency shared by the 17 euro zone countries, however, is still down 1.2 percent so far in November and analysts said it should struggle to retain gains even if concerns about Greece abate.
Euro zone finance ministers will give a tentative go-ahead for the disbursement of 44 billion euros in emergency loans to Greece on Tuesday, but the money will only be paid on Dec. 5 if the country meets all remaining conditions.
While additional funds for Greece removes an important psychological obstacle, the country's economic influence in the euro zone is relatively minor compared to that of debt-burdened Italy and Spain.
Spain is the euro zone's fourth-largest economy and it has not applied for a bailout yet. A bailout would likely cause the euro to rally above $1.30, according to strategists, as it would pave the way for the European Central Bank to buy its bonds and lower the country's borrowing costs.
"For the euro/dollar to see an extended run ... a serious improvement in risk appetite is needed, with a Spanish bailout or an exceptionally quick compromise to the US fiscal slope necessary as the proper catalyst," said Christopher Vecchio, currency analyst at DailyFX in New York.
The euro was last up 0.5 percent at $1.2804, having hit a high of $1.2819, its highest since Nov. 7.
Also a negative for the euro is the fact that the euro zone's economy remains mired in a recession while the US economy has been steadily improving, as made evident by the latest data on the housing market.
Home re-sales unexpectedly rose in October while home-builder sentiment rose to its highest in more than six years.
Analysts at Morgan Stanley recommended buying the euro at $1.2730, with a target of $1.33 and a stop at $1.2650.
FISCAL CLIFF CLIFFHANGER
Risk appetite improved, with world stock markets recovering some of their sharp losses last week, fueled by comments from US lawmakers who indicated that compromises are possible in negotiations to avert $600 billion in tax increases and spending cuts due to start kicking in in January.
Many believe this "fiscal cliff" threatens to send the US economy back into recession, but the dollar would benefit in this scenario due to risk aversion.
The dollar should weaken against the Canadian dollar and British pound into year-end, according to Camilla Sutton, chief currency strategist at Scotiabank in Toronto.
"The focus post-US election has been on the fiscal cliff, which we recognize as an important risk; however we believe that markets have moved too far into tunnel vision and are neglecting other important dollar drivers," she said.
"The most important of which is the Fed meeting on Dec. 12, where we expect QE3 to be expanded to include Treasuries (at the conclusion of Operation Twist)."
The Fed's Operation Twist entails selling short-term securities in exchange for long-term bonds.
Meanwhile, investors have been selling the yen after elections were called for Dec. 16 and the leader of the opposition Liberal Democratic Party called on the BOJ to print "unlimited yen" and set rates at zero or below.
But investors were wary of pushing it much lower before a BOJ policy announcement on Tuesday. Most analysts expect it will not announce additional monetary easing.
"It's most unlikely the BOJ will make major changes this meeting, but the trend (for the yen) seems to be changing," said Audrey Childe-Freeman, head of foreign exchange strategy at BMO Capital Markets.
Against the yen, the dollar last traded down 0.1 percent at 81.18 yen, according to Reuters data.