LONDON: The euro steadied on Thursday, pulling back from highs hit the previous day after joint action by major central banks to ease dollar funding strains buoyed riskier assets but still left the euro zone debt crisis unresolved.
Debt auctions in Spain and France are likely to be a reminder of the huge funding problems facing many euro zone countries, with borrowing costs at Spain's debt sale set to be among the highest it has faced since 1997.
Analysts say the auction could well go like Italy's sale of three and 10-year bonds on Tuesday, which drew reasonable demand but saw yields leap to levels deemed unsustainable for public finances.
The euro was down 0.1 percent on the day at $1.3431, weighed down after European Central Bank President Mario Draghi said downside risks to the economic outlook have increased and that the bank's temporary measures are only limited.
The euro stayed below Wednesday's one-week high of $1.3533, when it jumped after central banks of the United States, euro zone, Canada, Britain, Japan and Switzerland cut the cost of dollar loans to the banking system.
Traders said a break above $1.3533 could see the euro benefit from short covering, taking it towards the Nov. 18 high of $1.3614. If it fails to retest Wednesday's high, however, the rally is likely to peter out.
"There are such huge short euro/dollar positions that if the markets are able to penetrate resistance levels then the euro might succeed in breaking higher," said Jan Bylov, chief currency analyst at Nordea in Copenhagen.
"But that is the best we can hope for because the action from the central banks will not solve Europe's problems. If euro/dollar does not accelerate today the rally will just fade away".
Currency speculators increased their net short position in the euro to 85,068 contracts in the week ended Nov. 22, the biggest net short position in the euro since June 2010, pointing to the potential for some short-covering in the euro.
"There could be a little more short-covering in the euro ahead of the year-end, but that may be all," said Masahide Sato, vice president at Mizuho Corporate Bank's forex division in Tokyo.
"The market still hasn't been shown any convincing steps aimed at solving the (euro zone's) debt problems".
AWAITING EU SUMMIT
After dipping to a seven-week low last Friday, the euro has had some reprieve this week on short-covering, helped by signs that Germany and France are pushing for more rapid, deeper fiscal integration among euro zone countries.
Key for the euro's outlook will be whether European leaders are able to agree on credible action to tackle the debt crisis at a European Union summit on Dec 9.
The Polish EU presidency said on Wednesday that EU finance ministers expect the ECB to step in forcefully to calm bond markets if EU leaders agree to move towards fiscal union at next week's summit.
Growth-linked commodity currencies such as the Australian dollar slipped after receiving a substantial boost from the joint central bank action and as China cut reserve requirements for commercial lenders for the first time in three years.
The Australian dollar was down 1.1 percent on the day at $1.0160, having jumped about 2.7 percent on Wednesday to a high of $1.0335.
The US dollar index was up 0.1 percent at 78.240, recovering from a low of 77.923 hit on Wednesday.
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