Euro gains on cautious optimism before summit

LONDON: The euro rose against the dollar on Wednesday on cautious optimism that euro zone leaders may reach a deal to ease Greece's debt problems, but with gains capped due to concerns that the risks of contagion would remain.

French ministers said on Wednesday that European leaders were less divided than the media was reporting and were likely to reach an accord at the summit that will ease Greece's debt woes.

The euro was last up 0.6 percent at $1.4235. But gains were seen capped well below last week's high around $1.4283, with the single currency vulnerable to signs the debt crisis could still spread to larger countries like Italy and Spain.

Better appetite for risk among investors also buoyed the euro and weighed on the dollar, with European equities up 1.0 percent on signs of progress on a US budget-reduction deal and strong earnings from Apple.

"There are glimmers of hope that deals will be made in the euro zone and US but uncertainty will still prevail and prevent any aggressive positioning ahead of the summit," said Roberto Mialich, currency strategist.

Traders cited a Bloomberg report that euro zone officials would consider allowing the region's rescue fund to be used to recapitalise the banks and to buy government bonds in the secondary market, which they said helped lift the euro.

The proposals tally with those in a euro zone document preparing the ground for Thursday's summit, which was exclusively reported by Reuters on Tuesday.

The single currency was also supported as euro zone sources said the summit would be delayed slightly to allow time for a deal to be reached on the involvement of the private sector.

This buoyed sentiment after German Chancellor Angela Merkel on Tuesday dampened expectations the summit would produce any comprehensive solution to Greece's debt crisis, saying further steps would be needed.

Meanwhile in the United States, a group of Democratic and Republican senators presented a new plan late on Tuesday that could revive stalled US debt talks and avert a default by the world's biggest economy.

RISKS AHEAD

Analysts and traders remained concerned that a second Greek bailout may only give temporary relief for the euro as wider debt problems on the euro zone's periphery would remain.

"There is a feeling that there will be some kind of deal on Greece at the summit, but there are no guarantees this will ease concerns about the crisis spreading to Italy or Spain and people are unlikely to push euro/dollar too much higher," said Niels Christensen, currency strategist at Nordea in Copenhagen.

The euro sat well above a four-month low near $1.3838 hit last week, with support near $1.4120, which roughly coincides with trendline support on hourly charts, and traders saying it was propped up by Asian sovereign demand.

However, it faces resistance near $1.4219, a 76.4 percent retracement of its recent drop to $1.4015 from $1.4282, and more near $1.4300, around the 55-day and 100-day moving averages.

Some technical analysts pointed to the fact that the 55-day average will soon move below the 100-day average, a bearish signal that could see the euro target its 200-day average around $1.3914.

Elsewhere, commodity-linked currencies were supported by better appetite for risk, with the New Zealand dollar at $0.8546 against the US dollar, near an earlier 30-year high of $0.8568.

The Canadian dollar also hit a two-and-a-half month high of C$0.9470 per US dollar, helped by Chinese oil producer CNOOC Ltd's saying it would buy Canada's Opti Canada Inc.

The dollar fell 0.2 percent against the yen to 78.93 yen , having backed off an intraday high near 79.30 yen.

Copyright Reuters, 2011