LONDON: The euro hit a three-week high versus the dollar on Wednesday on tentative optimism that European leaders would reach agreement on a way to resolve the euro zone debt crisis.
The euro recovered from earlier falls, made after Slovakia rejected on Tuesday a plan to expand the euro zone rescue fund, as investors took the view the government would eventually endorse the scheme.
Traders said the euro extended gains following the break of an options barrier at $1.3700. They added that the single currency was benefiting from investors taking profit on previous short positions.
Gains were expected to be limited, however, as concerns lingered about political hurdles that could hamper efforts to prevent contagion from the crisis.
The euro rose 0.8 percent to a high of $1.3761, with traders saying stops were taken out on the break of $1.3710. This pushed it well above a trough of $1.3582 hit in Asian trade in a knee-jerk response to the Slovak vote.
Technical support was seen around $1.3520-25 -- the 50 percent retracement of the $1.3346-1.3698 rally.
Traders took some comfort as German Chancellor Angela Merkel said she was certain there would be full ratification of the European Financial Stability Facility (EFSF) by the time of the Oct. 23 European Union summit.
"No one really believes Slovakia is able to stop the ratification of the EFSF and that's why euro/dollar is not lower," said Niels Christensen, currency strategist at Nordea in Copenhagen.
A spokesman for the senior government party in Slovakia -- the only euro zone country yet to ratify the EFSF expansion -- said parties would start talks on Wednesday and a new vote could be held as soon as Thursday.
Sentiment was also helped after inspectors from the 'troika' of the European Union, IMF and European Central Bank said on Tuesday an 8 billion euro loan tranche to Greece should be paid in early November.
Against the yen, the euro also hit a three-week high of 105.30 yen, with traders saying an options barrier at 105.00 yen was taken out. It was well above a 10-year low hit last week at 100.77 yen.
Nordea's Christensen said movements in equities could be the main driver of currencies in the near term, with the focus on the US earnings season and on company outlooks.
Copyright Reuters, 2011