NEW YORK: The euro recovered from a two-year low against the dollar on Monday, but looked highly fragile on scant hopes that a euro zone finance ministers meeting later in the day will show progress in containing the region's debt crisis.
Euro zone finance chiefs will try to flesh out plans to reinforce the single currency but their talks in Brussels may do little more than highlight the limitations of last month's deal to help indebted states and banks.
Diminished hopes also weighed on Spanish and Italian bonds, with yields moving back up to unsustainable levels.
In testimony on Monday, European Central Bank President Mario Draghi said fixing Europe's debt woes required action by both monetary and fiscal authorities.
"Effective crisis resolution needs bold actions by central banks but it also needs bold actions by other policy actors, notably governments," he told the European Parliament's Economic and Monetary Affairs Committee.
"The market's overall cautious mood and a rise in Spanish and Italian bond yields is weighing on the euro, although reports that Spain's budget targets may be relaxed is perhaps providing a partial offset," said Nick Bennenbroek, head of currency strategy at Wells Fargo in New York.
European Union finance ministers are set to grant Spain until 2014 to reach a deficit target of 3 percent of GDP, three EU diplomats said on Monday.
"For the week ahead we expect some consolidation in FX markets, with an overall neutral directional view on the US dollar and other currencies," Bennenbroek said.
Strategists said further rises in Spanish and Italian bond yields could push the euro down further, potentially bringing the 2010 low of $1.1876 into view.
But having lost more than 3 percent against the dollar last week, the euro may have scope for a temporary rebound as traders take profit on hefty bearish positions.
The euro was last up 0.1 percent against the dollar at $1.2294, off a low of $1.2255 hit in thin early trade as traders reported demand to sell the currency above $1.2300.
The euro came under pressure last week as doubts quickly surfaced about the effectiveness of the June summit deal. It fell further following a widely expected interest rate cut by the European Central Bank on Thursday.
Pressure for action by European leaders is growing, but there are nagging concerns that decisions on issues such as banking supervision, how to use Europe's rescue money, aid to Spain and Cyprus, and whether to grant concessions to Greece may take months to finalize.
"If leaders couldn't agree on details, there's little chance that the finance ministers will reach any further agreement, so anyone betting on another positive surprise might be disappointed," said Kimihiko Tomita, head of foreign exchange for State Street Global Markets in Tokyo.
WEAK US JOBS
US jobs data on Friday showed the economy created far fewer jobs than needed to bring down the 8.2 percent unemployment rate, weighing on risk sentiment.
Softer-than-expected Chinese inflation data on Monday added to concerns Europe's debt crisis was weighing on global growth, which is likely to stoke demand for the safe-haven dollar.
The dollar was at 79.58 yen, moving away from a two-week high of 80.099 hit on Thursday. Chart support was seen at the 200-day moving average at 78.97 yen.
Data released early in the session showed Japan's core machinery orders fell at a record pace in May, but the market reaction was muted because it failed to change expectations the Bank of Japan will stand pat on policy at its meeting this week.
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