The euro jumped above $1.07 for the first time since mid-November on Monday, rebounding around 2 cents after hitting 21-month lows after Italy's prime minister conceded defeat in a referendum on constitutional reform and said he would resign. The single currency slid as much as 1.4 percent in Asian trade to $1.0505, its weakest since March 2015, as investors fretted Matteo Renzi's departure would lead to more political instability in the currency union.
By 1225 GMT, though, it had recovered all of those losses and was up around half a percent on the day at $1.0701. The bounce was chiefly down to over-extended bets against the euro, traders said, with investors choosing to cash in gains and lighten their short positions ahead of Thursday's European Central Bank policy meeting.
"I think the euro is going to strengthen a lot now. I think it is way oversold," said Nick D'Onofrio, chief executive at London-based hedge fund North Asset Management. Markets broadly expect the ECB to extend its asset-purchase programme for six months, but it is unclear whether it will keep up purchases of 80 billion euros per month or scale back its bond-buying programme.
Citi's head of currency strategy in London, Richard Cochinos, said investors were buying back the euro ahead of the ECB's meeting. He said the euro fell sharply in Asian trade because the currency market was the first place in which investors could react to the Italian vote result, with European bond and equity markets closed at the time. "The currency market was really the only market that was open at that time, so the euro bore the brunt of the news of the referendum not passing," he said.
Renzi's resignation could open the door to an early election next year and the possibility of the anti-euro 5-Star Movement gaining power at a time when the European Union is still reeling from Britain's vote to leave the bloc earlier this year. An early election would likely rattle investors, with opinion polls showing Renzi's Democratic Party (PD) running neck-and-neck with 5-Star, which wants a referendum on Italy's membership of the euro zone.
The dollar climbed 0.8 percent to 114.47 yen, having softened on Friday as investors took profits from its recent gains following solid but unspectacular US non-farm payrolls data for November. Data on Friday showed that the net long position of speculators on the greenback had risen rose to their highest since mid-January. Elsewhere, the New Zealand dollar fell almost one percent to $0.7070 after Prime Minister John Key, who won praise for his economic stewardship after the global financial crisis, unexpectedly announced his resignation.
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