The euro crawled back from a fresh 16-month low to the dollar on Monday as traders trimmed short positions, but it was vulnerable to further falls due to worries over sovereign funding in the eurozone and the region's economic prospects. German Chancellor Angela Merkel and French President Nicolas Sarkozy met on Monday to discuss ways to boost growth and increase fiscal co-ordination in the eurozone.
Many investors expect the euro will come under more pressure if the leaders fail to come up with concrete plans to help bring down borrowing costs soon for Italy and Spain as the yields on their bonds hover around levels at which other eurozone countries requested debt bailouts. Both countries face their first bond auctions of the year this week.
The euro also struggled after a German magazine reported the International Monetary Fund was losing confidence in Greece's ability to clean up its public finances. In addition, an adviser to German Finance Minister Wolfgang Schaeuble told a Greek newspaper a planned 50 percent writedown on Greek debt holdings would not be enough to put its huge debt on a viable footing.
Schaeuble himself highlighted the urgency of rescuing Greece from a possible debt default, telling German radio that the progress of bailout talks "could go faster". The euro traded 0.3 percent higher on the day at $1.2760, but market participants said there was a firm bias in favour of further drops.
It had hit its lowest level since September 2010 of $1.2666 on trading platform EBS in thin Asian trade, with Tokyo markets shut for a public holiday. The euro, which also plumbed an 11-year low of 97.28 yen, has taken a hit across the board, with ECB data showing the single currency on Friday hit an 8 1/2-year low on a trade-weighted basis.
"This move up in the euro on the day is just position adjustment as the market is very short euros and that position increased further after Friday's US payrolls," said Lee Hardman, currency strategist at BTM-UFJ. The jobs data highlighted the diverging growth outlook between the United States and Europe and supported the greenback, but Hardman was sceptical over potential for higher US rates.
"The Fed has made a strong commitment to keep US interest rates low and we don't think stronger US data will be backed with higher rates for the foreseeable future. The dollar is more likely to continue to strengthen from risk aversion," he said. The dollar held steady against the yen at 76.80 yen, staying above a two-month low of 76.30 yen hit last week. The dollar eased from a 16-month high against a currency basket of 81.47 in Asia to stand at 81.070. Focus in the eurozone this week will fall on the Spanish and Italian bond sales, with few signs that investors have started 2012 with improved appetite for the region's riskier assets.
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