LONDON: The euro was firmer on Monday, but its advance appeared to run out of steam after the International Monetary Fund quashed a media report that it was preparing an aid package for Italy.
Investor attention is now focussed on Belgian bond auctions later in the day, with the country looking to raise one to two billion euros at considerably higher costs after Standard & Poor's cut the country's credit rating late on Friday.
Belgium's benchmark 10-year yield has risen to near the 6 percent level, taking it closer to levels at which countries such as Portugal and Ireland had to start considering bailouts.
With Italy, France and Spain also looking to sell debt this week, analysts said the euro is likely to trade more in sync with bond yields. Borrowing costs for all three European countries have risen in recent days as contagion from the debt crisis spread, keeping the euro pinned near recent lows.
The euro was up 0.7 percent on the day at $1.3319, off a session high of $1.33445, with its Oct 4 low of around $1.3145 still in sight. Traders cited stops below $1.3255 while offers are said to be at $1.3340-50 with stops at $1.3355 and $1.3370.
The euro had pushed higher in Asia on short-covering after an unsourced report in Italian daily La Stampa said up to 600 billion euros could be made available at a rate of between 4-5 percent to give Italy breathing space for 18 months.
An IMF spokesperson said there were no discussions with the Italian authorities on a program for IMF financing.
"The IMF report was denied and this brings the market's focus back to how critical a stage the sovereign debt crisis is at," said Jane Foley, senior currency analyst at Rabobank.
"The euro looks very vulnerable in a week where there is an awful amount of supply from euro zone countries. Trade will be directional and will be based on how the response is to these auctions."
Selling pressure on the euro intensified last week in the wake of a weak bond auction in Germany, the euro zone's safest haven. Italy's short-term debt sale on Friday was also poorly received, sending Italian two-year yields to a euro-era high above 8 percent on Friday.
Currency speculators have increased their bearish bets against the euro in the latest week to Nov. 15. Their steady selling has seen the euro turn lower on the year against the US dollar and has lost some 7 percent -- from a high of $1.4248 on Oct. 27 to a trough near $1.3213 on Nov. 25.
SELLING INTO STRENGTH
Italian 10-year spreads over German bunds narrowed on Monday on talk of reported buying by the European Central Bank, but overall sentiment towards euro zone assets remains bearish with investors seeking a comprehensive and quick solution from policymakers to contain the debt damage.
Germany and France are exploring radical methods of securing deeper and more rapid fiscal integration among euro zone countries, although officials are aware that getting broad backing for the necessary treaty changes may not be possible. .
Euro zone finance ministers will meet on Tuesday where detailed operational rules for the euro zone's bailout fund are ready for approval, documents obtained by Reuters showed. The meeting could also sign off Greece's 8 billion euro aid tranche.
"Whether progress on both of these can deliver a euro boost is doubtful, with the market focus moving on," said Tom Levinson, currency strategist at ING. "In this respect, after last week's poor bund auction, French and Belgium auctions will be watched closely."
The latest bounce in the euro saw the dollar index fall 0.6 percent to 79.20, retreating from a two-month peak of 79.702 set Friday.
Against the yen, the dollar dipped 0.1 percent to 77.67 .
Commodity currencies outperformed the euro, with the Australian dollar surging 1.6 percent to $0.9857, having climbed to as high as $0.9888 earlier on Monday. The New Zealand dollar also rose 1.8 percent to $0.7518.
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