Euro heads for best week since January; rally may fade

The euro headed for its best week in nine months against the dollar on Friday on optimism that European leaders would take bold steps to tackle the debt crisis, but a lack of concrete actions could limit further gains. Group of 20 finance ministers and central bank chiefs began a two-day meeting in Paris on Friday, a day after the euro zone's 17 member nations completed their approval of the expansion of the region's bailout fund.
Hopes that officials will agree on the outlines of a plan in time for a European Union summit on October 23 boosted the euro. Discussions that China, India and other fast-growing economies might bolster the capital base of the International Capital Fund to help rescue Greece further lifted sentiment.
That lifted the common currency to a one-month high just beneath $1.39. In the near term, analysts said momentum traders could still push the euro a bit higher, though it remained fragile and may hit a top ahead of $1.40 in the coming days. "A lot of this is a short-covering rally," said Mark McCormick, currency strategist at Brown Brothers Harriman in New York.
Even though there's positive news from the G20 and optimism that European policymakers would take bold actions, "there's still a lot of time in between when these things are announced, when these things can be enacted, and when they can be put in place to actually forestall further contagion," he said.
The euro touched a session high of $1.3895 on trading platform EBS. It was up 3.5 percent on the week, on pace for its biggest weekly rise since mid-January. Data from the Commodity Futures Trading Commission showed Friday that speculators reduced bets against the euro, as they slightly boosted long positions in the US dollar.
Talk that the European Central Bank was buying Italian and Spanish debt also helped lift the single currency off an earlier low of $1.3723. Standard & Poor's cut Spain's credit rating, underlining the challenges facing euro zone officials to contain the debt crisis. Fitch put a number of European banks on review for possible downgrades.
Greek Finance Minister Evangelos Venizelos pledged to pass sweeping austerity measures in parliament next week, declaring that Greece was in a "fight for our existence." Inspectors from the European Union, International Monetary Fund and European Central Bank said they would recommend releasing an 8 billion euro tranche of aid that Greece needs to keep paying its bills past mid-November. But they warned that the country was slipping behind on its targets.
Avery Shenfeld, chief economist at CIBC World Markets, said for now, hopes that Greece will receive loans and steps to expand the European Financial Stability Facility (EFSF) have calmed market jitters. But he added: "an actual plan will be tougher to deliver, and the Greek issue will return as that country inevitably fails to meets its new targets. A default on Greek debt still leaves risk that investors will refuse to fund Spain or Italy, countries that the current EFSF isn't large enough to bail out."
Against the yen, the dollar rose 0.5 percent to 77.22, after hitting 77.45 on EBS, near a one-month high set on Wednesday. On the week, the dollar gained 0.6 percent. An increase in risk appetite hurt the safe-haven dollar, which slipped 0.5 percent against a basket of currencies. The dollar index was on track for a weekly loss of 2.6 percent, the biggest since May 2009. Earnings releases next week 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.