NEW YORK: The euro rose slightly against the US dollar on Monday as traders paused for breath after driving the single currency to a four-month low and awaited a euro-zone leaders' meeting later this week.
The one-way trade of selling the euro was showing signs of exhaustion, traders said. That, combined with extreme levels of euro short positioning, which reached a record last week, suggested a short-term bounce.
But any recovery was set to be short-lived as worries about Greece persisted even after world leaders at a weekend meeting expressed support for Athens to stay in the euro.
Focus is now shifting to an informal EU summit on Wednesday, when French President Francois Hollande is expected to promote the idea of mutualized European debt, an idea that Germany opposes.
"The euro is pretty vulnerable to at least a short-term bounce," said Mark McCormick, currency strategist at Brown Brothers Harriman in New York. "This week's informal European summit may provide scope for positive headlines.
"But I think this is the kind of rally that you want to fade," he added. "It's more related to positioning adjustment and some technical exhaustion."
The euro was at $1.2790, more than a cent above Friday's low of $1.2640. It has fallen 3.5 percent so far this month.
Strong support lies around the 2012 low around $1.2624 and a break would take the shared currency to levels not seen since August 2010.
Brad Bechtel, managing director at Faros Trading in Stamford, Connecticut, said euro/dollar has made an important double bottom, suggesting markets could be in a for "a good-sized bounce." But he added that offers on the euro are thick above $1.2880 and above $1.2950.
Commerzbank in a note to clients said its order book showed at a spot rate of $1.2778, the density of euro buy orders exceeds that of the sell orders.
"The order book analysis therefore suggests that euro/dollar is currently under buying pressure. At levels around $1.2860, the sell and buy densities are about equal, which suggests that an upmove would lose momentum in this area," the bank said.
IMPLIED VOL
Nervousness was apparent in the options market, with one-month at-the-money implied volatility hitting a more than three-month high on Monday at 12.15 percent. It last traded down on the day at 11.38 percent.
Traders said demand for downside strikes in euro/dollar continued, especially in the $1.20 area.
"I still think (the euro) is a sell on rallies, not just against the dollar but also the yen," said Jeremy Stretch, head of currency research at CIBC World Markets.
"That 2012 low is still the target and the euro would need a catalyst for that. That could come if the informal (EU) leaders' meeting this week offers no consensus" on tackling the euro-zone debt crisis.
The euro-zone crisis has escalated since inconclusive Greek elections on May 6 raised questions over whether Greece will stay in the bloc. Concerns about the fragility of the Spanish banking sector have also weighed on sentiment.
The euro rose 0.5 percent to 101.48 yen, after hitting a 3-1/2-month low 100.219 yen on Friday. It was up 0.3 percent at 80.91 pence..
The US Commodity Futures Trading Commission said on Friday speculators' short euro positions climbed to 173,869 contracts, the highest on record, while their bets in favor of the dollar against other currencies also rose to a high not seen since at least mid-2008.
The dollar gained 0.4 percent to 79.31 yen, well above a three-month low around 79.00 set on Friday.
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