LONDON: The euro dipped on Tuesday on caution over a Slovak vote on changes to the euro zone's rescue fund, but it held in positive territory for the week after hopes for a solution to the debt crisis sparked a squeeze of short positions in the currency.
Slovakia is the only one of the euro zone's 17 members that has yet to ratify changes to the 440-billion-euro European Financial Stability Facility.
The Slovak ruling coalition remained split over a deal to broaden the EFSF and any delay in passing the legislation could affect sentiment toward the euro.
"The general view is 'by hook or by crook the Slovaks will get this deal through', though they may have to rely on the opposition to so," said ING currency strategist Tom Levinson.
The euro was down 0.3 percent for the day at $1.3605, off a session low of $1.3577. It surged 2 percent on Monday for its biggest daily percentage gain in 15 months to a near three-week high of $1.3698.
Monday's rally followed a Franco-German pledge that they would do what was necessary to shore up banks, settle the Greek crisis and accelerate economic coordination in the euro zone.
Market participants said the euro could still rise in the near term given a recent build-up in short euro positions.
"The euro can go higher because short positioning is still extreme. Monday's rally only partially offset that position." said Manuel Oliveri, currency strategist at UBS in Zurich.
Data from the US Commodity Futures Trading Commission shows currency speculators increased their net short positions in the euro to 82,697 contracts in the week ended Oct. 4, the biggest in four months.
A lasting euro rally was still unlikely, however, with uncertainty over the details of EU policymakers' plans to recapitalise banks, in the face of expectations that Greece could default on its debts, keeping investors wary of establishing outright long positions in the common currency.
"There's plenty of nerves around the euro as yesterday's rally looks to be based upon based on politics and chat rather than anything concrete," Levinson said.
Risk-reversals, a measure of the premium required to hold a put or a call in a currency, show investors hedging against a fall in the euro. The one-month 25-delta risk-reversal traded around 2.55 for euro puts, compared to 2.80 at the end of last week.
Major resistance for the euro is found at $1.3680-90, the 38.2 percent Fibonacci retracement of the $1.4550/$1.3145 move and the Sept. 28 trend high. Traders reported offers around $1.3670 and more supply ahead of a $1.3700 option barrier.
On the downside, traders highlighted decent bids from $1.3570 down to $1.3550.
Despite Europe's problems, recent economic data has been better than feared, reducing the danger of a global recession and helping to support riskier assets.
The Australian dollar dipped 0.6 percent to $0.9924 , giving back some gains after climbing 2.4 percent on Monday, its biggest one-day rally since June 2010.
The Aussie faces stiff resistance at $1.0035 -- a 38.2 percent retracement of its slide from a $1.1081 high in late July to a $0.9388 low plumbed in early October.
The dollar held steady at 76.66 yen , not far from a record low near 75.94 yen struck in August.
It was up 0.5 percent against the Swiss franc at 0.9084 after falling more than 2 percent on Monday when the US currency came under heavy selling pressure as equity markets rose and appetite for risk improved on optimism over the euro crisis.
Copyright Reuters, 2011