NEW YORK: The euro retreated from a near three-week high against the dollar on Monday as doubts lingered over whether Spain's bank bailout could solve the country's debt problems, with markets wary of taking on risk ahead of next weekend's Greek elections.
The euro zone agreed to lend Spain, the region's fourth-largest economy, up to 100 billion euros to help prevent a run on banks, offering some reassurance to investors and helping the common currency jump more than 1 percent in Asian trade.
But gains were pared in the London session as traders and analysts said the details of the bailout deal were still unclear and concerns remained about Spain's large debt burden given the country's stagnant economy.
"The risk rally fell flat really quickly," said Greg Anderson, G10 strategist at CitiFX, a division of Citigroup in New York. "On top of the Spain news, data out of China this weekend was better-than-expected, so it seems clear the market does not want to believe good news."
"People are also very nervous ahead of the Greek elections and there are plenty of other worms in the can, namely the potential of another downgrade of Spain's debt."
The euro ran into selling during the European trading session and was last up 0.3 percent at $1.2554. Nevertheless, it remained well above the near two-year low of $1.2286 hit earlier this month.
"While this is good news for Spanish banking stocks and good news in the short term, I'm not certain it solves Spain's problems," said Simon Derrick, head of currency research at Bank of New York Mellon.
"Agree a bailout for Spain and the best you get is a 100-odd point rally in euro/dollar. People recognise this is not a silver bullet. I think the euro will weaken slowly over the next couple of days."
Against the yen, the single currency rose to 100.88 yen, its highest level in more than two weeks, before retracing to trade up 0.4 percent at 99.82.
Also underscoring the market's cautious tone was a rise in Spanish and Italian bond yields as initial market relief over Spain's bank funding deal gave way to doubts.
Data out of China over the weekend boosted risk sentiment as it was not as bearish as many traders had feared following Beijing's first interest rate cut since the global financial crisis on Thursday.
GREEK ELECTIONS
Traders said any euro bounce should give way to profit taking before the June 17 Greek elections. A win for parties opposing the austerity terms of the country's international bailout could lead to Greece leaving the euro.
With the terms of the Spanish deal still not clear, there were also worries that other countries that have received a bailout - Greece, Portugal and Ireland - may protest that Spain was offered better terms than they were.
Unease about the euro was also evident in the options market, with one-month euro/dollar implied volatility -- a measure of how volatile a currency is expected to be -- trading as high as 13.1 percent compared with 12.3 percent on Friday.
Underscoring the prevailing bearish sentiment, bets against the euro surged to a record high in the week to June 5, while net long dollar positions extended gains, according to the Commodity Futures Trading Commission.
Against the yen, the dollar last traded up 0.1 percent at 79.52.
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