LONDON: The euro steadied against the dollar on Wednesday but looked likely to stay subdued with investors cautious ahead of Spanish and Italian debt sales later in the week that could trigger a sell-off in riskier assets if they go badly.
With euro zone bond auctions having a big impact on market sentiment, investors were also looking ahead to a German 5-year debt auction on Wednesday where demand was expected to be solid.
The single currency was last flat on the day at $1.2774. It held within sight of a 16-month trough at $1.2666 set on Monday on trading platform EBS. Resistance is seen at the previous day's high around $1.2820, a level representing the 38.2 percent retracement of the Jan. 3 to 9 decline.
There was talk of bids below $1.2700 and also an option barrier at $1.2650, which suggests the euro may attract bids from option players if it approaches that level.
Analysts warned that risks to the euro around the German debt sale were one-sided. A poor auction could prompt investors to sell the single currency on the view even the euro zone's strongest economy is at risk of contagion.
But Ian Stannard, head of European FX strategy at Morgan Stanley, said very strong demand at the German auction may also be interpreted as a risk-averse move, boding badly for the peripheral auctions later in the week.
"The overall picture for the euro is very negative. If the (German) auction goes well that would be seen as a positive, but my interpretation is that very strong demand signals a very high level of risk aversion, with buying into core Europe," he said.
"If there is poor demand, and that is seen throughout all the auctions this week from the core to the periphery, that will be an outright negative for the euro."
Market players were also reluctant to initiate big trades before a European Central Bank meeting on Thursday. Policymakers are expected to keep rates on hold at 1 percent and press governments to step up their efforts to tackle the debt crisis.
BROAD EURO WEAKNESS
The euro struggled versus the Australian dollar, trading at A$1.2379, near a record low around A$1.2355 hit on Tuesday. Against the yen, the common currency edged up 0.1 percent to 98.31, not far from an 11-year low of 97.28 yen set on Monday on EBS.
"It looks like the amount of short positions held by short-term players has decreased and a test of the upside might be tough," said a trader for a Japanese bank in Singapore, referring to the outlook for euro/yen.
Traders may be looking to re-enter short positions in euro/yen, he said.
The Australian dollar was flat against the US currency at $1.0306 after having rallied over the previous two days. The Aussie had risen to as high as $1.0352 on Tuesday, a 2 percent rally from Monday's low of $1.0145.
"Part of the reason why the Aussie has put on two cents in the last few days is the view that China is going to further loosen policy, which eventually is going to be good for Australian commodity products," said Joseph Capurso, strategist at Commonwealth Bank in Sydney.
"But I think that's overdone and won't be surprised to see the Aussie ease back for the reminder of the week."
The dollar rose 0.1 percent against the yen to 76.93, staying above a two-month low of 76.30 yen hit last week.
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