LONDON: The euro hit a one-month high against the dollar on Monday after a G20 summit left hopes intact the EU would decisively address the region's debt crisis this week, with traders seeing scope for further gains on short-covering.
Some investors were wary of selling the single currency in case of a positive outcome from an European Union summit on Oct. 23. Traders said this possibility could support the euro, though it was expected to face stiff resistance ahead of $1.40.
The euro hit a one-month high of $1.39148 on EBS trading platform, up 0.25 percent, extending gains after breaking above a reported options barrier at $1.3900, though traders cited offers up to around $1.3930.
"The closing down of short euro positions is a big reason for the move up in euro/dollar, combined with expectations the EU will come up with a plan at the summit that will cap the fear of the euro zone debt crisis spreading," said Niels Christensen, currency strategist at Nordea in Copenhagen.
He said the euro's gains were also partly due to a weaker dollar as above-forecast US retail sales data on Friday eased worries about the global economic outlook, lifting shares and dampening safe-haven demand for the greenback.
However, the euro's recent sharp gains have left it vulnerable to a pullback if investors become worried the EU leaders may not be able to contain the debt crisis.
"Generally investors would rather be long dollar and short euro and would be quick to reset those positions," Christensen said.
The euro rallied 3.5 percent against the dollar last week after the leaders of Germany and France pledged to unveil a new package for solving the two-year crisis at the EU summit, including an agreement on how to recapitalise banks.
Expectations for the plan -- which also aims to make Greece's mountain of debt more manageable and to bolster the firepower of the euro zone's rescue fund -- helped lift the euro off a nine-month low around $1.3145 hit on Oct. 4.
"It will have a hard time going above $1.40 ahead of the EU meeting as contagion fears -- indicated by elevated levels of European bond yields -- are still showing almost no signs of abating," said Sumino Kamei, senior currency analyst, Bank of Tokyo-Mitsubishi UFJ in Tokyo.
Data showed speculators pared short euro positions in the week to Oct. 11, though traders and analysts said it was likely that not all short positions had been cleared, leaving scope for further short-covering to help the euro .
LAYERS OF RESISTANCE
The euro's rise may be halted at $1.3937, resistance marked by a couple of daily highs hit in September, or at its 55-day moving average near $1.3952.
While attendees at the G20 summit said the pace of discussions was encouraging, policymakers face resistance from banks over moves to increase private sector participation in Greek debt restructuring and to force banks to raise capital.
Underscoring the difficult issues that negotiations must address, German Finance Minister Wolfgang Schaeuble said on Sunday that Greece's debt crisis could not be solved without larger write-downs on Greek debt.
Schaeuble speaks in London later on Monday.
Support for the euro is seen around $1.3834, roughly matching a 38.2 percent retracement of a fall from around $1.4940 in May to the Oct. 4 nine-month low of $1.3145.
The euro also hit a five-week high of 107.67 yen, according to EBS data, well above a 10-year low of 100.77 yen struck in early October.
Earnings releases from US companies including Citigroup , Goldman Sachs and Apple could also affect the euro's performance, which has closely tracked investors' appetite for stocks and other risky assets.
The euro's gains helped push the dollar index to a one-month low of 76.441.
Copyright Reuters, 2011