TOKYO: The euro rose on Friday as investors bullish on the currency in the medium term bought it back after a steep slide on Thursday, but it remained vulnerable to a sell-off if a euro zone summit later in the day fails to ease concerns about sovereign debt.
For now, however, the single currency remains on an upward bias in the short term on technical charts. But it needs to stay above $1.3777, a touch higher than Thursday's low in order to maintain its bullish momentum.
A daily close below $1.3777 would probably push the euro to $1.3591, a 38.2 percent Fibonacci retrenchment of the January to early March rally, analysts said.
Despite Friday's gains however, the euro is down 1.3 percent so far this week, on track for its worst weekly performance since early January.
Some analysts said a "buy-on-dips" strategy makes sense for the euro as the prospect of a series of rate hikes by the European Central Bank should underpin the currency this year.
"Any disappointment with the policy response to the sovereign debt crisis should challenge the euro near term, especially as investors remain overly optimistic about the prospects of a resolution," said Gabriel De Kock, currency strategist at Morgan Stanley in New York.
"However, we expect broad-based gains after ECB rate hikes get under way, most likely in April."
Euro zone leaders meet on Friday, ahead of a full 27-nation European Union summit on March 24-25, to tackle the region's debt crisis. There was some nervousness before Friday's meeting, but that has since dissipated as investors are not expecting any major announcement that could appease worries about the debt crisis.
Moody's also turned up the heat on Europe this week, slashing Greece's credit rating by three notches and Spain by one and threatening more downgrades. That has weighed on the euro since hitting four-month highs last Monday.
In midday Tokyo trading, the euro was up 0.2 percent on the day at $1.3817. It slid to one-week lows at around $1.3775 overnight.
"These gains in the euro are all about positioning," said Yuki Sakasai, currency strategist at Barclays Capital in Tokyo. "People are cutting their positions on the euro ahead of the EU summit later today. There was a lot of nervousness ahead of that meeting, but things have calmed down a bit because we're not expecting any concrete solution from that meeting."
Implied volatility on the euro versus the dollar edged higher across the curve in line with the single currency's fall in the spot market. One-month implied volatility on euro/dollar, for instance, hit as high as 10.35 percent from Thursday's peak of 10.25.
Traders are expecting sharp moves over the next 30 days with the European Union heads of state summit on March 24-25 and a possible rate hike by the European Central Bank in early April.
Sentiment on the euro has deteriorated a bit in the options market, with one-month 25 delta risk reversals showing a bias for puts at -1.700 vols on Friday. Earlier in the week, one-month euro/dollar puts were at -1.125 vols, much higher from levels on Friday and in line with the euro hitting four month peaks above $1.4035.
The fall in the euro helped the dollar move further away from a four-month trough against a basket of major currencies. The dollar index rose as high as 77.244 on Friday, well off the low of 76.124 set on Monday. It was still down 0.2 percent on the day at 77.123, however.
The dollar was slightly down against the yen, briefly pushing above 83 yen for the first time since late February before retreating slightly to 82.81 yen
Diminishing risk appetite fuelled in part by reports of police firing on protesters in Saudi Arabia, which revived fears of further unrest in the world's top exporter, also helped the greenback.
The Australian dollar recouped its losses as well after falls the previous session. Data showing that Chinese inflation numbers for February remained under control eased fears of an imminent interest rate hike.
Australia also relies heavily on China's seemingly insatiable demand for its iron ore and coal exports and any sign that China is slowing or could slow because of interest rate increases would be a bane for the Australian economy.
The Aussie dollar was last up 0.2 percent versus the greenback at US$1.0030. Traders said the Aussie has been underpinned by corporate bids.
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