TOKYO: The safe-haven dollar edged higher against a basket of major currencies on Monday, extending last week's hefty gains, as worries about the sputtering global economy and the euro zone debt crisis weighed on investor appetite for risk.
The greenback strengthened versus the euro, shrugging off efforts by European officials to ease funding strains on the continent's banking system, with markets cautiously awaiting the outcome of the European Union meeting on Thursday and Friday.
The dollar index, which rallied 1 percent last week, was at 82.361, close to a peak of 82.469 set on Friday. Against the yen, it shot up to a two-month high at 80.63 yen, before profit-taking pulled it 0.2 percent lower to 88.34.
Mitul Kotecha, head of global foreign exchange strategy for Credit Agricole in Hong Kong, said that markets will likely stay stuck in recent ranges ahead the meeting, which will focus on debt mutualisation, fiscal and banking union and potential renegotiation of Greece's bailout terms.
"Given the uncertainty ahead of the EU summit it is unilkely that the euro will break out of its current ranges," he said.
The common currency fell 0.3 percent to $1.2536 from 1.2563 seen late in New York. Traders said it was ensconed between solid buying interest from central banks at $1.2520 and large macro-fund sell orders emerging above 1.2600.
A break below key support at the 50 percent retracement of its June rally from 1.2288 to 1.2748 at 1.2520 could open up the way to a test of 1.2440, traders said.
A meeting of German, French, Italian and Spanish leaders on Friday saw Germany agree to a 130 billion euro package to revive growth, but there was little progress on a more flexible use of Europe's rescue funds.
Limiting damage for the euro, the European Central Bank has started to accept a wider range of collateral in its lending operations in a move designed specifically to help ease the stress in Spain's banking sector.
"Hopes ahead of the summit may encourage more short-covering but as usual scope for disagreement and disappointment on many fronts suggests that investors should not become overly buyllish," said Credit Agricole's Kotecha.
COMMODITY CURRENCIES ALSO WEAK
Commodity currencies also fell against the dollar, extending last week's decline as commodity prices recoiled on the increasingly grim global growth outlook.
The Australian dollar traded at $1.0022, edging back towards $1.0008 plumbed on Friday. Good support is seen at $0.9979, the 38.2 percent retracement of its June 1-20 rally.
Analysts at Barclays Capital expect the EU summit will yield more strong rhetoric in support of a roadmap towards tighter fiscal integration, rather than the end point itself.
"This may disappoint markets to some extent. We prefer remaining long USD over the week especially against European currencies," they wrote in a note.
Currency speculators were less optimistic about the sustainability of the dollar's rally.
They pared their bets in favor of the US unit, according to data from the Commodity Futures Trading Commission. The value of the dollar's net long position fell to $22.13 billion in the week ended June 19, from $38.77 billion the previous week.
A visit to Athens on Monday by officials from Greece's "troika" of lenders - the European Union, European Central Bank and International Monetary Fund has been canceled as Greece's new prime minister and incoming finance minister have both been taken ill.
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