LONDON: The euro dipped against the dollar on Thursday, reversing gains after spiking on reports China was considering greater involvement in euro zone bailout funds, and looking set to stay subdued in the absence of a Greek debt swap deal.
The euro jumped to $1.3188 from around $1.3130 after Chinese Premier Wen Jiabao said China was considering greater involvement in the European Financial Stability Facility and its successor, the European Stability Mechanism.
But the single currency quickly shed those gains to last trade down 0.2 percent on the day at $1.3133, with traders citing selling by an Asian central bank.
Wen tempered his comments by saying Europe must rely on itself, reduce its debt load and introduce structural reforms. He also said China was still researching how to participate in the EFSF and ESM.
"It's important because the headlines we were getting last year were suggesting China was still reluctant (to support the funds)," said George Saravelos, FX strategist at Deutsche Bank.
Strategists said although greater support from China would be helpful, it was not a gamechanging event for the euro zone, and the progress of talks to avoid a disorderly Greek default was more significant in the near term.
Hopes that a deal between Greece and its private creditors was close offered the currency some support, but analysts said investors would be wary of pushing the euro too high following a week of rumours that a deal was imminent.
The euro remained firmly within its range of the last week, roughly between $1.3230 and $1.3020. Strategists said a Greek deal could push the euro to break higher, but any rally may only be temporary.
"The initial reaction (to a deal) will be very positive but afterwards we will have to look closely at the details. It's very tricky to set up such a deal," said Ulrich Leuchtmann, head of FX research at Commerzbank.
Decent demand at French and Spanish auctions had little impact, with market players attributing recent successful euro zone debt auctions to the European Central Bank's injection of nearly half a trillion euros of cheap funds.
"Ultimately those steps will not resolve long-term solvency concerns, effectively all it does is buy those countries time to try to put in place a more credible fiscal consolidation programme," said Lee Hardman, currency strategist at BTM-UFJ.
INTERVENTION WATCH
The dollar dipped 0.1 percent to 76.12 yen, stuck near a three-month low of 76.027 yen hit on Wednesday on trading platform EBS. The US currency has come under pressure after the Federal Reserve said last week it was likely to keep interest rates near zero at least until late 2014.
The dollar has been edging closer to a record low of 75.311 yen hit on Oct. 31, when Japan intervened to curb yen strength.
Japan might intervene again if dollar/yen drops below 75.50 yen or market volatility were to increase sharply, said Gareth Berry, G10 FX analyst for UBS in Singapore.
Japanese Finance Minister Jun Azumi said on Thursday he is prepared to take firm measures on currencies when needed, hinting at the chance of solo intervention in forex markets as the yen edges higher versus the dollar.
The dollar rose 0.1 percent against a basket of currencies to 79.015, while markets watched for any moves from the Swiss National Bank as the euro traded within sight of the floor it set at 1.20 Swiss francs.
The Australian dollar retreated from a five-month high of US$1.0758 hit after data showed Australia's trade surplus rebounded to the highest in three months in December.
Market players were also looking ahead to US jobless figures and a testimony by Federal Reserve Chairman Ben Bernanke on the state of the US economy later in the session. Any further signs of dovishness from Bernanke could give another boost to perceived riskier currencies against the dollar.
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