NEW YORK: The euro traded at a near three-week high against the dollar on Monday as a squeeze on short positions added to last week's momentum, signaling that markets had become cautiously optimistic that Greece can cut a deal on a key debt swap.
Euro zone finance ministers will decide on Monday what terms of a Greek debt restructuring they are ready to accept as part of a second bailout package for Athens after negotiators for private creditors said they could not improve their offer.
But analysts cautioned that, while a deal for debt-laden Greece could ease fears that the country might experience a disorderly default, the region's credit crisis was far from resolved and the euro would remain vulnerable.
"Obviously anytime we talk about Greece everyone wants to be a little optimistic, (to have) a reason to buy back the euro after its downfall at the end of last year, but it's always a tricky thing," said John Doyle, a currency strategist with Tempus Consulting in Washington, D.C.
"Moving ... forward there will be still-considerable downward pressure on the currency," he added, calling the euro's advance on Monday "more of a short squeeze."
Private creditors said on Sunday they had come to the limits of what losses they could concede, putting the ball in the court of the European Union and the International Monetary Fund.
European leaders said they were hopeful talks could conclude soon.
"The talks have been moving well (ahead) at the technical level and I am certain that we will take stock of the PSI talks concerning Greece today in the Eurogroup," said Olli Rehn, the EU economic and monetary affairs commissioner. "And I am confident that we can conclude the negotiations on the PSI (private sector involvement) shortly - preferably in the course of this week."
The euro was supported by investors taking profit on short positions. Data showed speculators boosted net euro short positions to a fourth straight record in the week to Jan. 17.
"IMM data shows short positions are extremely stretched and we're seeing a squeeze today," said Lee Hardman, currency strategist at BTM-UFJ.
The euro was up 0.6 percent at $1.3015 after hitting its strongest since early January at $1.30328 on EBS. Traders cited demand from Middle East accounts that lifted the currency and helped to trigger stop-losses on the break of Friday's high of $1.2986.
Markets had hoped for an agreement on Greek debt over the weekend, and analysts said they were still betting on a deal, leaving room for disappointment.
"It is uncertain what will happen with the restructuring of Greek debt, and after that there will be tough negotiations with the EU and the IMF about the next financing facility," said Niels Christensen, currency strategist at Nordea in Copenhagen.
The technical outlook for the euro was improved by last week's break above the 21-day moving average at $1.2870 for the first time this year.
The common currency slumped to a 17-month low of $1.2624 earlier this month. Traders said a break back below $1.2870-80 could see major support at $1.2800-10 tested.
FOMC, EARNINGS AWAITED
For the wider market, the Federal Reserve's two-day policy meeting starting on Tuesday will be the major event. Although no policy change is expected, the Fed could take the historic step of announcing an explicit target for inflation as part of its new communication strategy.
Traders said wariness ahead of this meeting and expectations of a continued easy monetary policy was helping to weigh on the dollar, pushing the dollar index below the 80.0 level. It was last down 0.55 percent on the day at 79.784.
Analysts were also waiting for a batch of US earnings reports due out this week to provide a gauge for the health of the world's biggest economy. Strong showings by companies could bolster hopes that a recovery is gaining steam, Doyle noted.
The euro was up 0.62 percent against the yen at 100.13 yen , taking it close to last week's peak at around 100.33.
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