Euro rebounds in London

The euro recovered from lows on Wednesday after Portugal successfully sold bonds, although it is likely to stay below recent four-month highs as the eurozone's debt problems outweigh expectations of a rise in interest rates. Portugal's cost of borrowing two-year debt rose to its highest since it joined the euro, highlighting the problems facing peripheral eurozone countries and keeping alive concerns that it will need an international bailout.
The common currency was up 0.3 percent at $1.3940, recovering from a low of $1.3857, according to Reuters data. Traders also cited talk that the European Central Bank was checking Greek and Irish government bond prices as behind the euro's bounce. Strong German output data also supported the euro.
The euro had hit a four-month high of $1.4036 in Monday, buoyed by growing expectations that the ECB will raise rates as soon as next month. But it ran into profit-taking after hitting those highs and worries about peripheral debt resurfaced. The dollar index fell 0.3 percent to 76.572 as investors paring short positions in the US unit took a breather. Data showed a sharp rise in dollar shorts in the week to March 1. The market's focus was on a euro zone summit on Friday, where 17 heads of state are expected to agree on the next cautious steps in their bid to quell the region's debt crisis, although they are unlikely to make a major breakthrough.
Friday's summit is only likely to lay the ground for a meeting of all 27 EU leaders in Brussels on March 24-25, when they hope to agree on a "comprehensive package" of measures they hope may draw a line under the crisis. One-month euro/dollar implied volatility edged up on Wednesday, trading around 10.15 percent, from 9.95 percent on Tuesday, suggesting slightly higher expectations of fluctuations in the currency's value.
The dollar was marginally higher against the yen at 82.70 yen, helped by a generally rising trend in US Treasury yields. Fund managers have been buyers of dollar/yen in recent weeks, according to UBS, although the bank said choppy US yields have limited gains in the currency pair.