The euro rebounded from an early fall on Thursday on Middle-East and sovereign buying, with worries over Portugal's political crisis and the health of the Spanish banking system increasingly factored in to the currency.
Still, traders say rallies are likely to be shallow and the euro will struggle to rise past option barriers around $1.4250, the level it hit on Tuesday for the first time since early November.
The euro was up 0.4 percent on the day at $1.4138 recovering from a low of $1.4049 hit after Moody's said it had downgraded 30 Spanish banks by one or more notches, though notably not the biggest players, Santander and BBVA. Also, Portugal's prime minister quit on Wednesday after parliament rejected his government's latest austerity measures, increasing the chances that the country will need a bailout..
The euro was helped by semi-official and Middle Eastern bids around the day's lows and macro account demand. More bids from the Middle-East were highlighted at $1.4010/20.
The single currency was underpinned by yield differentials as eurozone interest rates are likely to rise in the near-term to counter inflationary pressures, while US rates are set to remain low as its economy struggles. Danish bank Dankse recommended buying the euro at $1.4122 for a target of $1.46, with stops at $1.38. European Central Bank Executive Board member Juergen Stark was quoted on Thursday as saying that analysts have made the correct assessment of the ECB's message when it stopped saying that interest rates are appropriate.
But some in the market question the ECB's intent to tighten monetary policy at a time when some euro zone countries are suffering from fiscal issues, an issue which may haunt the euro in the future.
With the euro higher, the dollar index, which measures the dollar's value against a basket of currencies, was slightly lower at 75.776. Against the yen, the dollar held steady from late US trade at 81.00 yen.
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