LONDON: The euro rebounded from earlier losses on Tuesday, helped by a bounce in German investor sentiment and hopes that Greece will find a common ground with its euro zone partners for support beyond its current bailout programme.
Earlier, the euro had weakened after a collapse in talks to secure a new debt deal for Greece raised doubts about the country's future in the euro zone.
But Greek stocks cut losses, while Italian and Spanish 10-year government bond yields rose only slightly, amid hopes that a deal can be hammered out in coming weeks before Greece runs out of money.
The euro rose 0.7 percent to $1.1430, on track for its best daily percentage rise since Feb. 5.
Against sterling, it bounced from within a whisker of a seven-year trough of 73.69 pence set last week, to trade at 74.30 pence.
The currency was also helped by the German ZEW survey which showed analyst and investor sentiment rose in February to its highest level in a year.
"The reaction to the collapse of the talks was pretty muted.
Looking beyond the headlines it appears that both the Greeks as well as their European partners are inching closer to finding a solution," said Petr Krpata, FX strategist at ING. "So the market is not assigning a high probability for a Greek exit now, though the chances are rising."
Talks between Greece and euro zone finance ministers broke down when Athens rejected a proposal to request a six-month extension of its international bailout as "unacceptable".
The euro rose 1 percent to 135.96 yen, having hit a one-week low of 133.96 yen earlier.
The dollar edged up 0.3 percent to 118.75 yen, crawling away from a 10-day low of 118.11 struck on Monday.
Greece faces the risk of running out of funds when its bailout package expires at the end of this month, but investors were taking the view that throughout the euro zone debt crisis crucial agreements have tended to be clinched at the last minute.
"Even though it is clear that euro zone politicians are head to head in a high stakes game, it is possible that many investors are taking the view that a deal is still likely," said Jane Foley, senior currency strategist at Rabobank.
"After all, throughout the euro zone crisis, political breakthroughs tended to be made only when tensions were at boiling point."
The next focus points on Greece will be on Wednesday and Friday. On Wednesday the European Central Bank decides whether to maintain emergency lending to Greek banks that are bleeding deposits at an alarming pace.
And Dutch Finance Minister Jeroen Dijsselbloem, who chaired the meeting with Greece, said Athens has until Friday to request an extension.
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