LONDON: The euro retreated from six-week highs against the dollar on Monday as a rally driven by short-covering ran out of steam, with investors awaiting news that Greece and its private creditors are closer to a debt swap deal ahead of an EU summit.
An agreement to restructure private holdings of Greek debt is unlikely to be reached in time for the summit, at which euro zone leaders are expected to sign off on a permanent rescue fund for the euro zone and agree on inserting a balanced budget rule into national legislation.
Suggestions Greece should give up control of its budget policy to European institutions sparked an angry reaction from Greek Finance Minister Evangelos Venizelos, which traders said had also weighed on sentiment.
The single currency fell 0.5 percent to $1.3157 having hit a six-week high of $1.3233 in early trade. It had rallied almost 3 percent last week as speculators covered short positions.
Traders reported demand at $1.3110/20, with support at $1.3111, the euro's 55-day moving average.
"It looks like we will get a deal on Greece later in the week but it now looks to be contingent on who will provide the gap in Greece's finances," said Gavin Friend, currency strategist at National Australia Bank.
"I think the pullback in the euro today is because maybe the market was expecting something on Greece today and a little bit of optimism has faded," he said, adding he was not expecting the EU summit to have a major market impact.
The Greek debt deal, which would cut the long-term value of privately held bonds by just over 70 percent, is thought to be close, raising hopes that the country at the heart of the euro zone debt crisis can avoid a messy default.
The talks had run into trouble over the coupon rate and whether the ECB and other public creditors must also take losses on their holdings.
Reflecting negative sentiment towards the euro, data last Friday showed currency speculators boosted their net euro short positions to a record high for the fifth consecutive week in the week ended Jan. 24.
"Euro short positions are still very large and prone to be squeezed," said Friend.
Technical analysts highlighted resistance around $1.3244, the 38.2 percent retracement of the euro's October to January decline.
"Unless and until the obstacles to the second Greek bailout can be cleared, EURUSD should be capped by the $1.3244 key retracement resistance," said strategists at BNP Paribas in a note.
An Italian auction of five and 10-year bonds will also be closely watched for evidence that a recent string of relatively successful euro zone issuance can continue, keeping bond yields below from levels perceived to be unsustainable.
The euro bought 100.90 yen, up from Friday's low of 100.60 and well above a recent 11-year low of 97.04.
The Australian dollar moved further away from three-month peaks hit in the wake of the Fed's pledge to keep interest rates low, after ratings agency Fitch put major Australian banks on a negative ratings watch.
The Aussie was down 0.9 percent on the day at $1.0561 with traders citing selling by leveraged players.
A drop in riskier assets helped the dollar index bounce 0.3 percent to 79.155, compared with a 6-week low of 78.772 set on Friday.
On the yen, the dollar stood at 76.69 yen, steadying after two sessions of steep declines. The greenback had come under pressure last week after the Fed signalled it would not hike rates until at least late 2014 and kept the door open to additional stimulus.
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